Consider the basic AD/AS model.When wage rates rise faster than the increase in labour productivity,the
A)AD curve shifts left.
B)AS curve shifts upward.
C)output gap falls.
D)output gap increases.
E)AS curve shifts downward.

Question

Quizplus · Accepted Answer

When wage rates rise faster than the increase in labor productivity, the cost of production for firms increases. This leads to a decrease in the aggregate supply (AS) as firms are willing to supply less at the same price levels, hence the AS curve shifts upward.

Consider the Basic AD/AS Model