A sharp increase in stock prices makes people much wealthier.If the main effect of this increased wealth is felt on labor supply,what happens to current employment and the real wage rate?
A)Both employment and the real wage rate would increase.
B)Both employment and the real wage rate would decrease.
C)Employment would increase and the real wage would decrease.
D)Employment would decrease and the real wage would increase.

Question

Quizplus · Accepted Answer

When people feel wealthier due to a sharp increase in stock prices, they might choose to work less, reducing the labor supply. This decrease in labor supply would lead to a decrease in employment and, due to the scarcity of labor, an increase in the real wage rate.

A Sharp Increase in Stock Prices Makes People Much Wealthier