ECO 202-05 Principles of Macroeconomics (FA17) Test:EcO 202 Final Exam This Ques

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ECO 202-05 Principles of Macroeconomics (FA17) Test:EcO 202 Final Exam This Question: 1 pt 570195 (47 complete) The graph on the right shows a labor market that is initially in equilibrium. The market then experiences a shock to labor demand. Suppose the market is initially in equilibrium at E1, where the labor supply curve intersects the "Old labor demand" curve. A shock to the market causes the labor demand curve to decrease to "New labor demand If wages are completely flexible and can adjust freely and quickly, what would be the change in employment caused by the shock to labor demand? A. The labor market would move from E1 to E2, resulting in a decrease in O B. The labor market would move from E1 to A, which would result in a C. Since the wage is flexible and can adjust freely, the shock to the labor 0 D. Since the wage is flexible and can adjust freely, the shock to the labor employment of 3 thousand workers. decrease in employment of 1.5 thousand workers market would have no impact on employment market would greatly impact workers, causing employment to decrease de t 56T by 5.5 thousand workers Quantity of labor (thousar If wages, instead, face downward wage rigidity and remain at $5 50 per hour, what would be the change in employment caused by the shock to labor demand? O A. The labor market would move from E, to A which would result in a O B. The labor market would move from E, to E2 resulting in a decrease in Click to selet your answer decrease in employment of 1 5 thousand workers employment of 3 thousand workers

Explanation / Answer

1. Correct option: (B)

Reason: In the short run, due to labor shock, the economy moves from E1 to A. This leads to fall in wages and employment, leading to a shift of equilibrium with wages falling and increasing unemployment.

2. Correct option: (B)

Reason: Since wages are rigid, fall in wages will increase unemployment, moving equilibrium from E1 to E2

3. Rigid

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