Question

over the long run, falling nominal wages will shift the short-run aggregate supply curve to the ______, which causes output to ______ back to the full employment level. multiple choice question.

Answer 1

Falling nominal wages lead to a rightward shift of the short-run aggregate supply curve, increasing output back to full employment level. This long-run adjustment can take time, but both neoclassical and Keynesian economists recognize its importance in understanding economic equilibrium.

Step-by-step explanation:

Over the long run, falling nominal wages will shift the short-run aggregate supply curve to the right, which causes output to increase back to the full employment level. In neoclassical economic theory, when there is a higher level of unemployment, employers have the ability to hold down wage increases or hire workers willing to accept lower wages. This results in a decrease in the cost of labor, which is a key input in production processes. Subsequently, the decline in the price of this input causes a rightward shift in the short-run Keynesian aggregate supply curve (from SRAS to SRAS1). In the macroeconomic long run, this leads to a new equilibrium (from Eo to E1 to E2) where output levels return to potential GDP, albeit with a potential downward pressure on the price level. Keynesian economists note that if wages and prices take a long time to adjust, the economy's return to potential GDP could be slow. However, neoclassical economists stress the importance of their perspective even if adjustments take considerable time.

Answer 2

Falling nominal wages cause the short-run Keynesian aggregate supply curve to shift right, leading to an increase in output to the full employment level. The speed of these adjustments is debated, but they are crucial to the neoclassical understanding of economic recovery.

Step-by-step explanation:

Over the long run, falling nominal wages will shift the short-run aggregate supply curve to the right, which causes output to increase back to the full employment level. From a neoclassical perspective, when there is a higher level of unemployment, employers can hold wages steady or lower them due to the increased availability of workers willing to accept lower wages. This decline in wages, being a price of key input, means that the short-run Keynesian aggregate supply curve shifts right from its original position (SRAS) to SRAS₁, leading to an increase in output without upward pressure on the price level. Eventually, the macroeconomic equilibrium shifts, and the level of output returns to potential GDP.

How fast these adjustments take place is a matter of debate between Keynesian and neoclassical economists. Nonetheless, in the neoclassical view, even if these adjustments take years, this perspective remains critical for understanding the economic adjustments and the return to potential GDP in the long run.