Question

What variable allows our macroeconomic model to automatically adjust GDP back to full employment level of...

What variable allows our macroeconomic model to automatically adjust GDP back to full employment level of output (i.e., LRAS or trend GDP)?

changes in the CPI

changes in the money supply

changes in nominal interest rates

changes in nominal wages
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Answer #1

changes in nominal wages

(When output is less than full employment, there exists unemployment which will decrease nominal wages and thus cost of production decreases which increases SRAS and output returns to the full employment level. And when output is mpre than full employment, there exists more than full employment which will increase nominal wages and thus cost of production increases which decreases SRAS and output returns to the full employment level.)

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