Suppose that the economy is in a position of short-run equilibrium at a point where real GDP is below the full-employment level. Assuming no further change in aggregate demand and self-correction, the movement to a new long-run equilibrium includes a decrease in which of the following?
A) The unemployment rate.
B) The price level (CPI).
C) The level of nominal wages and salaries.
D) All of the above.

Question

Quizplus · Accepted Answer

In the movement to a new long-run equilibrium, there will be a decrease in the unemployment rate as the economy moves closer to full employment, a decrease in the price level (as firms adjust output in response to decreased demand), and a decrease in the level of nominal wages and salaries (as workers accept lower wages due to increased competition for jobs). Therefore, all of the above (choices A, B, and C) will decrease in the movement to a new long-run equilibrium.

Suppose That the Economy Is in a Position of Short-Run