Exhibit 15-1

-Refer to the graph in the exhibit.According to policymakers who favour a passive approach to policy, how will the economy attain equilibrium at potential output?
A) The SRAS curve will shift to the left.
B) Real wages will fall, shifting the SRAS curve to the right.
C) Either the money supply or government spending will be increased.
D) Either the money supply or government spending will be decreased.

Question

Exhibit 15-1
 
-Refer to the graph in the exhibit.According to policymakers who favour a passive approach to policy, how will the economy attain equilibrium at potential output?  
A) The SRAS curve will shift to the left. 
B) Real wages will fall, shifting the SRAS curve to the right. 
C) Either the money supply or government spending will be increased. 
D) Either the money supply or government spending will be decreased.

Quizplus · Accepted Answer

Policymakers who favor a passive approach to policy believe that the economy will self-correct. In the context of the question, this means that if the economy is not at potential output, adjustments in real wages (among other prices) will naturally occur to shift the Short-Run Aggregate Supply (SRAS) curve. Specifically, if the economy is below its potential output, real wages would fall, making it cheaper for firms to hire labor, which in turn increases production and shifts the SRAS curve to the right, moving the economy back to its potential output. This process does not involve active interventions like changing the money supply or government spending.

Exhibit 15-1 -Refer to the Graph in the Exhibit.According to Policymakers Who