Suppose the price level rises leading to a decrease in the real wage and increasing employment and real GDP.Which of the following are ways in which this occurs?
i.Firms employ more labour and increase output.
ii.Firms shut down.
iii.Firms start up a new business.
A)i only
B)ii only
C)iii only
D)i and iii
E)i,ii and iii

Question

Quizplus · Accepted Answer

When the price level rises, the real wage decreases, making it more profitable for firms to employ more labor and increase output, thus increasing employment and real GDP. This can also encourage the start-up of new businesses that benefit from the increased demand. However, it is unlikely for firms to shut down in response to increase in price level without considering other factors such as inflation expectations or changes in the business environment. Therefore, options i and iii are correct while option ii is not a likely scenario.

Suppose the Price Level Rises Leading to a Decrease in the Real