Author Question: Suppose the government lowers unemployment by hiring more government workers. How does it matter ... (Read 63 times)

HudsonKB16 · **on:** Jun 30, 2018

Suppose the government lowers unemployment by hiring more government workers. How does it matter whether wages and prices are sticky?

What will be an ideal response?

Question 2

At the optimal consumption bundle, the marginal rate of substitution of leisure for consumption is equal to

A) the real wage and the budget line is tangent to an indifference curve.
B) minus the real wage and the budget line is tangent to the indifference curve.
C) the real wage and the budget line intersects the indifference curve.
D) minus the real wage and the budget line intersects the indifference curve.

Hdosisshsbshs · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

As long as wages and prices are sticky, then the decrease in the unemployment rate will not cause a substantial increase in wages. However, if workers throughout the economy perceive an opportunity to seek an increase in their real wage, employers may need to comply in order to retain and attract qualified workers. If nominal wages increase, producers will need to raise prices. The resulting inflation will cause expected inflation to rise, sparking further increases in the nominal wage.

Answer to Question 2

A