Refer to the information provided in Figure 26.6 below to answer the question(s) that follow. Figure 26.6
-Refer to Figure 26.6. Suppose the equilibrium price level is 110. An increase in wages and an increase in government spending will, for sure, increase
A) both the equilibrium output and the price level.
B) the price level.
C) equilibrium output.
D) equilibrium output and decrease the price level.

Question

Refer to the information provided in Figure 26.6 below to answer the question(s) that follow.  Figure 26.6
-Refer to Figure 26.6. Suppose the equilibrium price level is 110. An increase in wages and an increase in government spending will, for sure, increase
A) both the equilibrium output and the price level. 
B) the price level. 
C) equilibrium output. 
D) equilibrium output and decrease the price level.

Quizplus · Accepted Answer

An increase in wages will increase production costs for firms, leading to a decrease in short-run aggregate supply (SRAS) and an increase in the price level. An increase in government spending will stimulate aggregate demand (AD), leading to an increase in both equilibrium output and the price level. However, the increase in wages will offset some of the increase in equilibrium output by reducing SRAS, so the net effect is an increase in the price level but no certain change in equilibrium output.

Refer to the Information Provided in Figure 26