Price Level changes by the same amount of nominal wages and resource costs
Sticky (Nominal) Wages
Sticky Resource Prices
Flexible (Nominal) Wages
Question 2
2.
At long-run equilibrium, the natural rate of unemployment is equal to the current rate of unemployment.
Question 3
3.
The long-run adjustment solution to a recessionary gap is for _________ to shift to the ______________________ . The long-run adjustment solution to a recessionary gap is for _________to shift to the _________ .
Other Answer Choices:
SRAS
Left
AD
LRAS
Right
Question 4
4.
Sequence the LR-Adjustment from LR to SR back to LR.
We have demand pull inflation and a positive output gap.
The economy starts in LR-Equilibrium.
In the SR, nominal wages are sticky, but firms will agree to higher nominal wages in the LR.
Due to higher prices, workers demand higher nominal wages.
AD shifts right
Question 5
5.
Sequence the LR-Adjustment from LR to SR back to LR.
The economy starts in LR-Equilibrium.
Oil prices rise.
SRAS will now shift right.
SRAS shifts left.
Due to lower RGDP, unemployment fears grow and workers are willing to accept lower nominal wages.
Price Level changes faster or more than nominal wages and resource costs
Short Run
Long Run
The economy is back to full employment with a higher PL and RGDP that is stabilized back at its full employment position.
SRAS shifts left.
Consumer confidence increases.
Nominal wages are sticky in the SR, but flexible in the LR. As such, firms will pay lower nominal wages in the LR.
We now have cost-push inflation, or a stagflation.
The economy will be back at long-run position with no change in PL or RGDP.