During 2010, a country reports that its price level fell and the money wage rate did not change. These changes lead to
A)a higher real wage rate, lower profits, and a decrease in the quantity of real GDP supplied.
B)a higher real wage rate, higher profits, and an increase in the quantity of real GDP supplied.
C)a lower real wage rate, lower profits, and a decrease in the quantity of real GDP supplied.
D)a lower real wage rate, higher profits, and an increase in the quantity of real GDP supplied.
E)no change in the real wage rate and an increase in aggregate demand.

Question

Quizplus · Accepted Answer

A fall in the price level with no change in the money wage rate leads to a higher real wage rate. This higher real wage rate reduces the quantity of labor supplied, which in turn reduces the quantity of real GDP supplied. The higher real wage rate also reduces profits, as firms must now pay more for labor.

During 2010, a Country Reports That Its Price Level Fell