Refer to the following figure when answering the following questions.
Figure 15.2: The Labor Market
-In the stylized DSGE model for the labor market displayed in Figure 15.2, with sticky wages, expansionary monetary policy would cause a move from ________ because ________.
A) of the natural rate of unemployment
B) involuntary unemployment would be zero
C) other prices would rise
D) the labor market would clear
E) real wages would rise

Question

Refer to the following figure when answering the following questions.
Figure 15.2: The Labor Market 
-In the stylized DSGE model for the labor market displayed in Figure 15.2, with sticky wages, expansionary monetary policy would cause a move from ________ because ________.
A) of the natural rate of unemployment 
B) involuntary unemployment would be zero 
C) other prices would rise 
D) the labor market would clear 
E) real wages would rise

Quizplus · Accepted Answer

In the stylized DSGE model with sticky wages, expansionary monetary policy would cause other prices to rise because nominal wages are sticky and cannot adjust immediately to changes in the money supply. As other prices increase, the real wage rate falls, which stimulates firms to increase employment and output. This results in a reduction in the natural rate of unemployment (the rate at which the labor market would clear if wages were perfectly flexible) but does not eliminate involuntary unemployment entirely.

Refer to the Following Figure When Answering the Following Questions