Refer to the following figure when answering
Figure 15.3: The Labor Market
-In the stylized DSGE model for the labor market displayed in Figure 15.3, with sticky prices, a monetary contraction would move the labor market from ________ because ________.
A) $a \rightarrow e;$ of $A D$ , and therefore real GDP falls
B) $a \rightarrow d;$ nominal wages and inflationary expectations rise
C) $b \rightarrow a;$ real wages fall, so workers supply less labor
D) $a \rightarrow c;$ future consumption falls, increasing labor supply
E) $e \rightarrow c;$ the labor market clears, but output markets do not

Question

Refer to the following figure when answering  
Figure 15.3: The Labor Market 
-In the stylized DSGE model for the labor market displayed in Figure 15.3, with sticky prices, a monetary contraction would move the labor market from ________ because ________.
A) $a \rightarrow e;$ of $A D$ , and therefore real GDP falls 
B) $a \rightarrow d;$ nominal wages and inflationary expectations rise 
C) $b \rightarrow a;$ real wages fall, so workers supply less labor 
D) $a \rightarrow c;$ future consumption falls, increasing labor supply 
E) $e \rightarrow c;$ the labor market clears, but output markets do not

Quizplus · Accepted Answer

A monetary contraction would shift the aggregate demand curve to the left, moving the labor market from point a to point e. This is because a monetary contraction reduces the money supply, which in turn raises interest rates. Higher interest rates make it more expensive for businesses to borrow money to invest, which reduces aggregate demand.

Refer to the Following Figure When Answering Figure a→e;a \rightarrow e;a→e;

Refer to the Following Figure When Answering
Figure $a \rightarrow e;$