Suppose the economy is in long-run equilibrium. In a short span of time, there is a sharp increase in the minimum wage. In the short run, what would we expect to happen?
A) the price level to rise, and real GDP to fall
B) the price level to fall, and real GDP to remain unchanged
C) the price level to remain unchanged, and real GDP to fall
D) the price level to fall, and the real GDP to rise the same

Question

Quizplus · Accepted Answer

An increase in the minimum wage can lead to higher production costs for businesses, which may pass these costs onto consumers in the form of higher prices, leading to a rise in the price level. Additionally, higher wages can lead to reduced employment or hours, as businesses may not be able to afford the increased labor costs, leading to a fall in real GDP in the short run.

Suppose the Economy Is in Long-Run Equilibrium