In the fooling model,AD/SAS equilibria to the left of LAS are unstable because ________ nominal wages shift ________.
A)falling,AD downward
B)falling,SAS downward
C)rising,AD upward
D)rising,SAS upward

Question

Quizplus · Accepted Answer

In the AD/SAS model, the equilibrium to the left of LAS indicates an economy with excess aggregate supply (SAS>AD). As a result, firms reduce prices and wages to sell their excess output, causing the SAS curve to shift downward. However, if nominal wages fall, the SAS curve shifts even further downward, pushing the equilibrium output and price levels lower. Therefore, AD/SAS equilibria to the left of LAS are unstable because falling nominal wages shift the SAS curve downward. The only option that describes this scenario is B.

In the Fooling Model,AD/SAS Equilibria to the Left of LAS