Why is the economy at full employment in the long run?
A) Only wages have the ability to adjust.
B) Only price can adjust.
C) Prices don't adjust.
D) Wages and the price level eventually adjust to develop full employment.
E) Wages don't adjust.

Question

Quizplus · Accepted Answer

In the long run, both wages and the price level can adjust to equate supply and demand in the labor market. In a market economy, firms strive to maximize profits and will hire workers up to the point where the marginal benefit of an additional worker equals the marginal cost. At the same time, workers will supply their labor up to the point where the wage equals their marginal cost of labor. This equilibrium is the level of employment consistent with full employment of all available resources. If wages are too high or the price level is too low, it will increase unemployment as firms can't afford to hire as many workers. However, if the price level is too high or wages are too low, supply will exceed demand and cause unemployment. Therefore, wages and prices adjust over time to a level that maintains full employment in the long run.

Why Is the Economy at Full Employment in the Long