In the classical model, an increase in aggregate demand will lead to an increase in wage rates while a decrease in aggregate demand will
A) leave wages unchanged since workers will not take a cut in pay.
B) decrease wages.
C) increase wages since business will be desperate for labor.
D) change the price of capital.

Question

Quizplus · Accepted Answer

In the classical model, an increase in aggregate demand will lead to an increase in real output and price level, which shifts the labor demand curve to the right, leading to an increase in wage rates. Conversely, a decrease in aggregate demand will lead to a decrease in real output and price level, which shifts the labor demand curve to the left, leading to a decrease in wage rates.

In the Classical Model, an Increase in Aggregate Demand Will