If output is below the natural rate, output will increase due to a _____ in wages, which leads _____ to shift to the right.
A) rise, AD
B) fall, AD
C) rise, AS
D) fall, AS

Question

Quizplus · Accepted Answer

When output is below the natural rate, wages tend to fall because of the excess supply of labor. This reduction in wages decreases production costs, leading the aggregate supply (AS) curve to shift to the right, indicating an increase in output at every price level.

If Output Is Below the Natural Rate, Output Will Increase