Suppose Caplan is correct about the social rate of return to education. And since the money supply has not changed, there is no reason to expect AD to change. In 4-6 sentences, answer both of the following questions. Real wages can never fall to the subsistence level, because employers compete with each other based on worker's marginal productivity. Critique this argument using ALD-ALS diagrams.
Real wages CAN fall to the subsistence level even though employers compete.
If labor productivity is low, so is labor demand, and there is nothing that precludes an equilibrium real wage at the subsistence level. Simon's historical evidence shows that in earlier periods of human history, wages were indeed very low, approaching the subsistence level. Mondor the spendthrift, and Ariste, the saver. Mondor on personal consumption, Ariste on investments. If both brothers were like Ariste, then, AD would not change.