Explain how the economy moves back to full employment from recession. Be sure to detail what happens to short-run aggregate supply, unemployment, equilibrium GDP and the price level
What will be an ideal response?
When an economy enters a recession, sales fall and unemployment rises via the automatic adjustment mechanism. The unemployment resulting from the recession makes workers more willing to accept lower wages. The slack demand will make firms willing to accept lower prices for their goods. In addition, the decline in the price level that occurs when the economy went into recession also makes workers willing to accept lower wages, and firms accept lower prices. This shifts the short-run aggregate supply curve to the right and moves the economy back toward potential GDP. Unemployment falls back to the natural level, and the price level falls.
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The above figure depicts the Edgeworth box for two individuals, Al and Bruce. Considering only the labeled points, point c is a possible equilibrium
A) only if it is the endowment. B) only if point a is the endowment. C) if either point a or b is the endowment. D) only if point d is the endowment.
Suppose group price discrimination is possible; however, a firm sets the same price in each market. As a result,
A) price elasticity of demand is the same in each market. B) the price-inelastic market will buy zero units. C) marginal revenue in the more price-elastic market exceeds marginal revenue in the less price-elastic market. D) the deadweight loss is less than if the firm price discriminated.