One determinant of the long-run average unemployment rate is the
a. rate of growth of the money supply, while the inflation rate depends primarily upon the market power of unions.
b. market power of unions, while the inflation rate depends primarily upon government spending.
c. existence of efficiency wages, while the inflation rate depends primarily upon the extent to which firms are competitive.
d. minimum wage, while the inflation rate depends primarily upon the money supply growth rate.
The correct answer and explanation is :
The correct answer is d. minimum wage, while the inflation rate depends primarily upon the money supply growth rate.
Explanation:
Minimum Wage and Long-Run Unemployment Rate:
In the long run, one important determinant of the unemployment rate is the minimum wage. The minimum wage sets a floor for the wage rate, above which employers are legally required to pay their workers. If the minimum wage is set too high relative to the productivity of workers, it can lead to an increase in unemployment, particularly for low-skilled workers. This is because employers may not find it economically viable to hire workers at the mandated wage, and as a result, job opportunities for those workers may decrease.
However, in the long run, the labor market can adjust. The effects of the minimum wage on unemployment depend on several factors, such as the elasticity of labor demand and the overall economic conditions. While the minimum wage can have a negative impact on employment, especially among younger or lower-skilled workers, its impact is more pronounced in the short run. Over time, market adjustments can mitigate some of these effects.
Money Supply Growth Rate and Inflation:
The inflation rate in the long run is largely determined by the rate of growth of the money supply. According to the classical theory of inflation, if the money supply grows faster than the economy’s output, it leads to inflation. The central bank controls the money supply, and when it increases the supply of money without a corresponding increase in goods and services, it creates excess demand, which leads to higher prices.
In the long run, inflation is primarily driven by the money supply because in the absence of external shocks, the aggregate demand and aggregate supply relationship typically dictates that inflation will follow the money supply growth. If the government or central bank is expanding the money supply rapidly, it leads to higher inflation rates over time, which is consistent with the long-run focus of the question.
Therefore, option d is the best choice as it correctly links the long-run unemployment rate to the minimum wage and the inflation rate to the money supply growth rate.