Suppose that the money wage in the economy increases by 8 percent. As a result the
A) long-run aggregate supply will decrease.
B) long-run and the short-run aggregate supply both decrease.
C) short-run aggregate supply will decrease.
D) long-run aggregate supply will increase and the short-run aggregate supply will decrease.

Question

Quizplus · Accepted Answer

A sudden increase in money wage will lead to an increase in the production costs of firms. As a result, in the short-run, the aggregate supply curve will shift leftwards. However, in the long-run, prices and wages adjust, and the economy will return to the natural rate of output. In the long-run, the aggregate supply curve is vertical, and it is determined by the economy's factors of production. Therefore, the long-run aggregate supply curve will not be affected.

Suppose That the Money Wage in the Economy Increases by 8