Consider a nation in which most workers are unionized. If all the nation's unions band together and succeed in boosting wages established by long-term labor contracts, then
A) there is a leftward shift in just LRAS.
B) there is a leftward shift in both LRAS and SRAS.
C) there is a rightward shift in just SRAS.
D) there is a rightward movement along the SRAS curve.

Question

Quizplus · Accepted Answer

When unions are successful in increasing wages set by long-term contracts, it leads to an increase in production costs for firms, which causes a leftward shift in both the short-run aggregate supply (SRAS) and long-run aggregate supply (LRAS) curves. This is because firms cannot increase output in the short run due to fixed factors of production, resulting in a decrease in real GDP and an increase in the price level. In the long run, wages and prices adjust, and the economy reaches a new equilibrium with lower real GDP and higher prices than before the union wage increase.

Consider a Nation in Which Most Workers Are Unionized