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Questions › DSE › DSE 2004 › Q21
2 marks, −1Macroeconomics › AD-AS model › Keynesian and short-run aggregate supplyHardabout 3 min

DSE 2004 Question 21: AD-AS model

Consider the labour market with D(w)=1−wD(w)=1-wD(w)=1−w, S(w)=wS(w)=wS(w)=w (w=W/Pw=W/Pw=W/P), but now the nominal wage WWW is always such that it minimizes ∣D(W/P)−S(W/P)∣|D(W/P)-S(W/P)|∣D(W/P)−S(W/P)∣ subject to W≥W0W\ge W_0W≥W0​, where W0>0W_0>0W0​>0 is an exogenous minimum nominal wage. Given the price level PPP, the nominal wage WWW is

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Consider the labour market with D(w)=1-w, S(w)=w (w=W/P), but now the nominal wage W is always such that it minimizes |D(W/P)-S(W/P)| subject to W≥ W₀, where W₀>0 is an exogenous minimum nominal wage. Given the price level P, the nominal wage W is (A) min {W₀, P/2} (B) max {W₀, P/2} (C) 1/2 (D) W₀/2

Also written as: Consider the labour market with D(w)=1-w, S(w)=w (w=W/P), but now the nominal wage W is always such that it minimizes |D(W/P)-S(W/P)| subject to W>= W_0, where W_0>0 is an exogenous minimum nominal wage. Given the price level P, the nominal wage W is

AD-AS model has come up 59 times in 7 exams since 2004.

What this question tests

This question is on Keynesian and short-run aggregate supply, part of AD-AS model in Macroeconomics.

Why output responds to demand in the short run: sticky wages and prices, wage floors and upward-sloping supply.

TestStop has 24 past-paper questions on this subtopic; the nearest in year are below.

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Question from the DSE 2004 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.