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

Question

Quizplus · Accepted Answer

An increase in the money wage in the economy will lead to an increase in the cost of production for firms, reducing their profitability. As a result, firms will supply a lower quantity of goods and services, and the short-run aggregate supply curve will shift to the left. The long-run aggregate supply, however, is determined by the economy's productive capacity and is not affected by changes in the price level or wages in the long run. Therefore, it remains unchanged.

Suppose That the Money Wage in the Economy Increases by 8