Suppose that the money wage in the economy increases by 8 percent. As a result the
A) long- run aggregate supply will increase and the short- run aggregate supply will decrease.
B) long- run aggregate supply will decrease.
C) short- run aggregate supply will decrease.
D) long- run and the short- run aggregate supply both decrease.

Question

Quizplus · Accepted Answer

An increase in the money wage will cause an increase in production costs and decrease in short-run aggregate supply (SRAS), as firms now need higher prices to cover their increased costs of production. However, in the long-run, prices of all inputs also adjust proportionately to the increase in the money wage, thus, the long-run aggregate supply (LRAS) will not be affected.

Suppose That the Money Wage in the Economy Increases by 8