Rachel usually takes long coffee breaks and works less whenever ...

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Rachel usually takes long coffee breaks and works less whenever her boss is out of town for business.
 
  However, she started taking shorter breaks when the Human Resource Manager at her company announced that each employee will henceforth be paid a performance-based incentive every month. What explains her behavior before and after the announcement of the new policy?

Question 2

What is the current equilibrium price level and real GDP for the economy illustrated in the figure above? Does this economy have an inflationary gap, a recessionary gap, or neither? As it adjusts toward full employment, which curve shifts?
 
  What is the equilibrium real GDP and price level that the economy will ultimately reach?

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Answer to Question 1

,Rachel usually works less whenever her boss goes out of town for business because it is not possible for her boss to monitor her work during those days. This is an example of the problem of moral hazard. Moral hazard refers to actions individuals take based on their private information that is unavailable to the other party in the transaction. In this case, Rachel knows how much time she spends working, while her boss does not know. This information asymmetry encourages her to take long breaks. However, when it was announced that each employee would be paid a performance-based incentive, Rachel started taking shorter breaks as she now had an incentive to work harder.

Answer to Question 2

The equilibrium is where the aggregate demand and aggregate supply curves intersect. Thus the equilibrium price level is 110 and equilibrium real GDP is 16.5 trillion. Real GDP exceeds potential GDP, so the economy has an inflationary ga

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