If labor unions negotiate an increase in the nominal wage rate the SAS curve will shift
A)upward to the right and output will increase.
B)downward to the right and output will increase.
C)downward to the left and output will decrease.
D)upward to the left and output will decrease.

Question

Quizplus · Accepted Answer

When labor unions negotiate an increase in the nominal wage rate, the cost of production for firms increases, which means that their marginal cost (MC) and average variable cost (AVC) of production increase. This results in a shift of the SAS curve upward to the left as the price level must increase to cover the higher costs of production. This shift in the SAS curve will lead to a decrease in output (real GDP) as the cost of production is higher, which is reflected in a higher price level.

If Labor Unions Negotiate an Increase in the Nominal Wage