In the fooling model's AD/SAS/LAS diagram,short-run equilibria to the left of the LAS curve require the price level to be
A)above what workers expect.
B)above what firms expect.
C)below what workers expect.
D)below what firms expect.

Question

Quizplus · Accepted Answer

In the fooling model, short-run equilibria to the left of the LAS curve occur when output is above potential output and unemployment is below its natural rate. To achieve such a situation, workers must be fooled into accepting lower real wages than they expect. This can happen if the price level is below what workers expect, so they are willing to work for lower nominal wages, which results in firms producing more and hiring more workers. Therefore, the price level must be below what workers expect for short-run equilibria to the left of the LAS curve.

In the Fooling Model's AD/SAS/LAS Diagram,short-Run Equilibria to the Left