Suppose the economy was initially in a long-run equilibrium. Then the world economy expands so that foreign incomes rise. U.S. aggregate demand ________ and eventually the money wage rate ________.
A) increases; rises
B) increases; falls
C) decreases; rises
D) decreases; falls

Question

Quizplus · Accepted Answer

When the world economy expands and foreign incomes rise, U.S. exports are likely to increase because foreign consumers and businesses have more income to spend, which can lead to an increase in U.S. aggregate demand. As the demand for goods and services increases, producers may need to hire more workers or pay higher wages to meet the increased demand, leading to a rise in the money wage rate over time.

Suppose the Economy Was Initially in a Long-Run Equilibrium