Using the aggregate demand-aggregate supply model, predict what happens in the short run if an increase in health insurance premiums paid by firms raises the cost of employing each worker.
A) The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.
B) The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.
C) The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.
D) The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.

Question

Quizplus · Accepted Answer

An increase in health insurance premiums paid by firms will increase the cost of employing each worker, thus leading to a decrease in aggregate supply. As a result, the aggregate supply curve will shift left, causing an increase in price level and a decrease in real GDP. The aggregate demand curve is not affected by this change. Therefore, the correct answer is D.

Using the Aggregate Demand-Aggregate Supply Model, Predict What Happens in the Short