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

Question

Quizplus · Accepted Answer

In the short-run, an increase in the money wage rate leads to an increase in production costs for firms, which leads to an increase in prices. As prices increase, demand for goods and services decrease, leading to a decrease in real GDP. Therefore, the correct answer is D, an increase in the price level and a decrease in real GDP.

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