Moving along the potential GDP line,the money wage rate changes by the same percentage as the change in the price level so that the real wage rate
A)increases.
B)decreases.
C)stays at the full-employment equilibrium level.
D)might either increase or decrease.
E)stays the same,though not necessarily at the full-employment equilibrium level.

Question

Quizplus · Accepted Answer

When the economy is at full employment equilibrium and moves along the potential GDP line, any change in the price level is matched by an equivalent change in the money wage rate. This means that the real wage rate (the purchasing power of the nominal wage rate) stays at the full-employment equilibrium level. Therefore, there is no pressure for firms to hire or reduce labor, and the economy continues to produce at the potential GDP level.

Moving Along the Potential GDP Line,the Money Wage Rate Changes