As the money wage rate increases,
A)potential GDP increases.
B)potential GDP decreases.
C)aggregate supply increases.
D)aggregate supply decreases.
E)aggregate supply and potential GDP do not change.

Question

Quizplus · Accepted Answer

As the money wage rate increases, the cost of producing goods and services also increases for firms. As a result, firms will produce less output (decreasing aggregate supply) which reduces potential GDP. This is due to the fact that with an increase in wages, costs rise, causing firms to reduce their output, which also reduces the supply of goods and services. Thus, aggregate supply decreases when the money wage rate increases.

As the Money Wage Rate Increases