In the short run, if there is an increase in the money wage rate, then
A) aggregate demand increases and the price level rises.
B) short- run aggregate supply decreases and the price level rises.
C) short- run aggregate supply increases and the price level rises.
D) aggregate demand decreases and the price level falls.

Question

Quizplus · Accepted Answer

An increase in the money wage rate will increase labor costs for businesses, causing them to produce less output given the same level of inputs. This will lead to a decrease in short-run aggregate supply and an increase in the price level. Option A is incorrect because an increase in money wage rate will decrease profits for businesses, causing them to reduce investment and hiring, which will decrease aggregate demand. Option C is incorrect because an increase in wage rate leads to an increase in production costs, causing a decrease in short-run aggregate supply. Option D is incorrect because a decrease in aggregate demand would happen because higher wages are leading to higher costs, which in turn would lead to lower profits for businesses, leading to reduced investment and hiring.

In the Short Run, If There Is an Increase in the Money