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Unformatted text preview: resources. But due to equilibrating forces at work, such as a fall in the rate of interest and a cut in the wage rates, a fresh demand for investment goods is generated. A fall in the wage rates reduces cost of production which induces producers to employ more workers. As a result of these adjustments the economy moves from E 1 to a new equilibrium point E 2 . At this point AD 2 intersects the new supply curve SAS 2 which has shifted downwards. Such a shift in the supply curve shows a fall in the cost of production due to a cut in the wage rates. At point E 2 the original equilibrium level of output Y can be produced which is the full employment level of output. The price level has now fallen to P 2 . Thus with a fall in the rate of interest, price level and wage rate, the restoration of full employment equilibrium level becomes possible....
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- Fall '10