In the model of this chapter prices like the real wage adjust to clear markets like the labour market.

Question

Quizplus · Accepted Answer

In the model of this chapter, prices are flexible and adjust to clear markets, including the labour market. This means that if there is excess supply of labour (unemployment), the real wage will decrease until all labour available is hired, and if there is excess demand for labour (labour shortage), the real wage will increase until firms reduce hiring or workers enter the labour market until demand equals supply.

In the Model of This Chapter Prices Like the Real