In the fooling model,suppose that from an initial AD/SAS/LAS equilibrium a sudden expansion of aggregate demand occurs.With fooling,we would find employment and the actual real wage in the labor market diagram by moving
A)"northeast" along the labor supply curve.
B)"northwest" along the labor demand curve.
C)"southeast" along the labor demand curve.
D)"southwest" along the labor supply curve.

Question

Quizplus · Accepted Answer

In the fooling model, an expansion of aggregate demand creates an initial increase in the nominal wage rate, which affects workers' expectations of the real wage rate. As a result of the increased nominal wage rate, workers supply more labor, shifting the labor supply curve to the right. However, employers are initially fooled into thinking that the increased nominal wage reflects an increase in productivity and, therefore, they hire more workers, shifting the labor demand curve to the right as well.

This results in an equilibrium where employment has increased but the actual real wage remains unchanged. To find this new equilibrium, we need to move southeast along the labor demand curve because employers are hiring more workers. At the same time, we move along the labor supply curve to the right as workers supply more labor. Therefore, the correct answer is C) "southeast" along the labor demand curve.

In the Fooling Model,suppose That from an Initial AD/SAS/LAS Equilibrium