In the short- run, a rise in the money wage rate leads to
A) an increase in the price level and a decrease in real GDP.
B) an increase in the price level and an increase in real GDP.
C) no change in the price level, but an increase in real GDP.
D) an increase in the price level, but no change in real GDP.

Question

Quizplus · Accepted Answer

In the short-run, a rise in the money wage rate leads to an increase in production costs for firms, which causes them to increase their prices to maintain profit margins. This, in turn, leads to an increase in the price level. However, higher wages do not necessarily lead to an increase in productivity or production, so real GDP decreases.

In the Short- Run, a Rise in the Money Wage