Use the aggregate supply/aggregate demand model in Figure 13.4 to answer the following scenario. The United Auto Workers were able to negotiate a contract for higher wages and better benefits. The economy initially moves from point ________ to point ________; eventually the economy returns to the steady state at point ________.
A) c; d; a
B) a; d; a
C) c; a; b
D) b; a; c
E) Not enough information is given.

Question

Quizplus · Accepted Answer

The negotiation for higher wages and better benefits would initially increase costs for auto manufacturers, leading to a decrease in aggregate supply and moving the economy from a point of equilibrium (point a) to a higher price level with lower output (point d). Over time, as the economy adjusts, it would return to the original level of output but at a higher price level, settling back at point a, indicating the long-term neutrality of money.

Use the Aggregate Supply/aggregate Demand Model in Figure 13