Assume that at full employment, the demand for workers equals supply at a real wage of $10; the quantity demanded and supplied is 100 million. The money wage is fixed in the short run at $10, and the price level at full employment is 100. The solid lines in the following graph show this. The “Demand and Supply for Workers” graph shows that as real wages go down, firms demand more workers but fewer workers want to work. Assume that employment equals the employers’ demand for workers in the short run because the workers are under contract to work the hours the employers demand. Where will the economy be on the graph if the price level falls to 80? Rises to 120?

Transcribed Image Text:

money /price- level) $12.50- Real Wages 10.00 $8.33- 90 E 100 (Full employment) D 110 Demand and Supply for Workers Supply of Workers Demand for Workers Workers (in millions)