In the graphs below, Q_P refers to the economy's potential output level. Refer to the graphs above. In Graph B, assume that the economy is initially in equilibrium at point x₁ but then there is an increase in the price level from P₁ to P₂. In the long run, this change will lead to: A) Lower nominal wages and a shift in the short-run aggregate supply curve from AS₁ to AS₂ B) Higher nominal wages and a shift in the short-run aggregate supply curve from AS₁ to AS₂ C) Lower nominal wages and a movement from equilibrium point x₁ to equilibrium point x₂ D) Higher nominal wages and a movement from equilibrium point x₁ to equilibrium point x₂

Question

Quizplus · Accepted Answer

When there is an increase in the price level, the nominal wages of workers also increase, causing short-run aggregate supply to decrease. In the long run, however, nominal wages will adjust to the new level, leading to an increase in the short-run aggregate supply curve and a shift from AS₁ to AS₂. Therefore, the correct choice is B because nominal wages will increase. The other choices are incorrect because they do not take into account the effect of wage adjustment on short-run aggregate supply.

In the Graphs Below, QP Refers to the Economy's Potential

In the Graphs Below, Q_P Refers to the Economy's Potential