part d Suppose the economy is in long-run equilibrium. (Note: This is from Chapter 20,which we will cover on April 26)a. Use the model of aggregate demand and aggregate supply to illustrate theinitial long-run equilibrium (label that point A). Be sure to include both short-run and long-run aggregate supply.b. Suppose the central bank raises the money supply by 5%. Illustrate in yourgraph what happens to output and the price level as the economy moves fromthe initial equilibrium to the new short-run equilibrium (label that point B).c. Now show the new long-run equilibrium (label that point C). What causes theeconomy to move from point B to point C?d. According to the sticky-wage theory of aggregate supply, how do nominalwages at point A compare to nominal wages at point B? How do nominalwages at point A compare to nominal wages at point C?e. According to sticky-wage theory of aggregate supply, how do real wages atpoint A compare to real wages at point B? How do real wages at point Acompare to real wages at point C?f. Judging by the impact of the money supply on nominal and real wages, is thisanalysis consistent with the proposition that money has real effects in the shortrun but is neutral in the long run? Explain.

As only part d is asked thus explaining part d only. According to the theory, nominal wages at point…

Answered: d. According to the sticky-wage theory…

d. According to the sticky-wage theory of aggregate supply, how do nominal wages at point A compare to nominal wages at point B? How do nominal wages at point A compare to nominal wages at point C?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

part d

Suppose the economy is in long-run equilibrium. (Note: This is from Chapter 20,
which we will cover on April 26)
a. Use the model of aggregate demand and aggregate supply to illustrate the
initial long-run equilibrium (label that point A). Be sure to include both short-
run and long-run aggregate supply.
b. Suppose the central bank raises the money supply by 5%. Illustrate in your
graph what happens to output and the price level as the economy moves from
the initial equilibrium to the new short-run equilibrium (label that point B).
c. Now show the new long-run equilibrium (label that point C). What causes the
economy to move from point B to point C?
d. According to the sticky-wage theory of aggregate supply, how do nominal
wages at point A compare to nominal wages at point B? How do nominal
wages at point A compare to nominal wages at point C?
e. According to sticky-wage theory of aggregate supply, how do real wages at
point A compare to real wages at point B? How do real wages at point A
compare to real wages at point C?
f. Judging by the impact of the money supply on nominal and real wages, is this
analysis consistent with the proposition that money has real effects in the short
run but is neutral in the long run? Explain.

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