Suppose that the money wage rate in the economy increases by 8 percent. As a result the
A) long-run aggregate supply will decrease.
B) long-run and the short-run aggregate supply both decrease.
C) short-run aggregate supply will 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 rate typically leads to a decrease in the short-run aggregate supply because it raises the costs of production for firms, making it more expensive to produce goods and services at any given price level. The long-run aggregate supply is not affected by changes in the money wage rate because, in the long run, prices and wages adjust to their equilibrium levels.

Suppose That the Money Wage Rate in the Economy Increases