Suppose that union leaders negotiate a significant increase in nominal wages. If the Federal Reserve holds the growth in the money supply constant, in the short run the aggregate supply curve will shift
A) up, unemployment will increase, and prices will rise.
B) down, unemployment will increase, and prices will rise.
C) down, unemployment will decrease, and prices will rise.
D) up, unemployment will decrease, and prices will rise.

Question

Quizplus · Accepted Answer

If the Federal Reserve holds the growth in the money supply constant, an increase in nominal wages will cause an increase in production costs for firms, leading to a decrease in short-run aggregate supply (SRAS) and an upward shift in the SRAS curve. This will result in higher prices and lower real output, leading to unemployment increasing in the short run. Therefore, the correct choice is A.

Suppose That Union Leaders Negotiate a Significant Increase in Nominal