Question

1. If the economy begins at a short-run equilibrium below potential output, then there would be

   		upward pressure on wages but not prices
   		upward pressure on prices but not on wages
   		downward pressure on wages but not on prices
   		downward pressure on both wages and prices

If the economy is at a short-run equilibrium above potential output, which of the following would occur

		upward pressure on wages because the labor market is operating above full employment
		upward pressure on wages because the labor market is operating below full employment
		downward pressure on wages because the labor markets are operating above full employment
		downward pressure on wages because the labor markets are operating below full employment

If the economy begins at a short-run equilibrium above potential output, then we would expect wage adjustment and price expectations change to

		shift the short-run aggregate supply curve down/right
		shift the short-run aggregate supply curve up/left
		shift the aggregate demand curve to the left
		shift the aggregate demand curve to the right

Answer 1

1.

Correct Answer:

D

When Economy is operating at lower than the potential output level, then there is a higher unemployment rate. It makes workers to work at lower wages and cost of production decreases. It makes AS curve to shift to the right. As a result, price level also decreases.

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2.

Correct Answer:

A

In the given scenario, unemployment rate is lower than the natural rate of unemployment, making less workers available. So, they demand higher wages to get employed.

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3.

Correct Answer:

B

When economy is operating above the potential output level, then demand pull inflation takes place in the economy. It makes SRAS curve to shift to the left direction.