In the cost-push model of inﬂation, increases in nominal-wage rates that exceed increases in the productivity of labor
A) increase aggregate supply and the price level in the economy.
B) increase aggregate supply and decrease the price level in the economy.
C) decrease aggregate supply and the price level in the economy.
D) decrease aggregate supply and increase the price level in the economy.

Question

Quizplus · Accepted Answer

Increases in nominal-wage rates that exceed increases in the productivity of labor lead to an increase in the cost of production for firms, which decreases aggregate supply. This decrease in supply leads to an increase in the price level in the economy, as firms try to pass on the higher costs to consumers through higher prices. Therefore, the correct choice is D, which states that increases in nominal-wage rates that exceed increases in the productivity of labor decrease aggregate supply and increase the price level in the economy.

In the Cost-Push Model of Inﬂation, Increases in Nominal-Wage Rates