Describe how adjustments in wages and prices take the economy from the short-run equilibrium to the long-run equilibrium
What will be an ideal response?
For example, if the level of output exceeds the level of potential output (a boom economy), the unemployment level will be low. As firms compete for workers and for raw materials, wages and prices will increase. This will cause the short-run aggregate supply curve to shift upwards, a process that will continue as long as the economy produces at a level of output that exceeds potential output. At some point the short-run aggregate supply curve will reach the long-run equilibrium, which is where the aggregate demand curve intersects the long-run aggregate supply curve.
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Mike has been unemployed for over a year. He hasn't looked for a job in the last three months, but he's just started looking for work again. Because Mike started looking for a new job,
A) the labor force participation rate decreased. B) the unemployment rate increased. C) the unemployment rate decreased. D) the working-age population increased.
Monetary policy has no effect on the equilibrium interest rate if
A) the inflation rate is zero. B) the economy is in the liquidity trap. C) velocity is constant. D) the economy is at full employment.