Chapter 11, Problem 2FCT

To determine

The reason why the effects of the minimum-wage-generated aggregate supply shock has persisted for many years in Puerto Rico.

Concept introduction:

Minimum Wage Rate- It is the minimum remuneration that an employer is legally permitted to pay to a hired employee. The minimum wage rate above the market clearing rate is considered to be an effective minimum while the minimum wage which is below the market clearing rate is an effective rate and the market equilibrium is not affected by the set wage floor.

Supply Shock- A sudden change in the supply of goods and services in an economy defines a supply shock. A sudden increase in the input costs or natural disasters can stimulate a supply shock.