When the price level rises and the money wage rate does not change,
A)the quantity of real GDP supplied increases as more businesses start up and potential GDP does not change.
B)the quantity of real GDP supplied decreases as more businesses fail and potential GDP does not change.
C)profits fall and more businesses fail.
D)existing businesses do not change their level of output.
E)the quantity of potential GDP increases because the quantity of real GDP supplied increases.

Question

Quizplus · Accepted Answer

When the price level rises and the money wage rate does not change, the real wage rate falls, making it cheaper for firms to hire labor. This increases the quantity of real GDP supplied as firms are incentivized to produce more due to higher profitability, while potential GDP remains unchanged.

When the Price Level Rises and the Money Wage Rate