When the level of wages in an economy fully adjust to changes in inﬂation, _____.
A) aggregate supply will increase
B) aggregate supply will remain constant
C) aggregate supply will decrease
D) ﬁrms' costs and revenues will vary frequently

Question

Quizplus · Accepted Answer

When wages fully adjust to changes in inflation, it means that any increase in the price level (inflation) is matched by an equivalent increase in wages. This keeps the real purchasing power of wages constant, which means that the cost of labor for firms, in real terms, remains unchanged. As a result, the aggregate supply in the economy would remain constant because the real cost of production has not changed.

When the Level of Wages in an Economy Fully Adjust