Suppose in Country X, anticipating high inflation in the economy, wages of workers are increased in the beginning of a financial year. However, prices remain unchanged during the year. Everything else remaining constant, which of the following will be observed in this economy?
A) The cost of labor, that is the real wage will decline
B) The current profits of the firm will rise
C) Aggregate supply in the economy will increase
D) Annual production in the economy will remain unaffected
E) The aggregate supply curve will move to the left

Question

Quizplus · Accepted Answer

The increase in wages without a corresponding increase in prices will raise production costs for firms, leading to a decrease in aggregate supply, shifting the aggregate supply curve to the left.

Suppose in Country X, Anticipating High Inflation in the Economy