In the figure above, at point C, the real wage is ________ its equilibrium value, leading to changes in the nominal wage that ________.
A) above, shift AD1 back to AD0
B) below, shift AD1 further to the right.
C) below, shift SAS0 upward.
D) above, shift SAS0 downward.

Question

Quizplus · Accepted Answer

At point C, the real wage is below its equilibrium value, which means that there is excess labor supply in the market. This leads to a decrease in the nominal wage, represented by a shift in the short-run aggregate supply curve (SAS) upward, since firms can hire more workers at a lower wage. The shift from SAS0 to SAS1 will eventually bring the market back to equilibrium at point E, where the nominal wage has adjusted to its new equilibrium value and the real wage is back to its equilibrium level.

In the Figure Above, at Point C, the Real Wage