📚 Learning Guide
Long Run Economic Adjustment
hard

In the context of long run economic adjustment, it is true that a decrease in nominal wages will always lead to an increase in the short-run aggregate supply (SRAS) curve, facilitating a return to full employment without any external intervention.

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Choose the Best Answer

A

True

B

False

Understanding the Answer

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Answer

In the long run, when nominal wages decrease, it means that workers are being paid less money for their labor. This reduction in wages lowers the overall cost for businesses to produce goods and services. As a result, businesses can afford to produce more, which shifts the short-run aggregate supply (SRAS) curve to the right, indicating an increase in supply. For example, if a factory pays its workers less, it can produce more toys at a lower cost, which helps the economy move back towards full employment. However, while this mechanism can help, it may not always happen without other factors at play, such as consumer demand or business confidence.

Detailed Explanation

A decrease in nominal wages does not guarantee an increase in short-run supply. Other options are incorrect because Some might think lower wages always help supply.

Key Concepts

Long Run Economic Adjustment
Short-Run Aggregate Supply (SRAS)
Nominal Wages
Topic

Long Run Economic Adjustment

Difficulty

hard level question

Cognitive Level

understand

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