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

Question

Quizplus · Accepted Answer

When wage rates rise faster than productivity, the cost of production for firms increases, leading to a leftward shift in the short-run AS curve. This results in a decrease in output and an increase in price level. Therefore, the correct answer is D, as the AS curve shifts upward.

When Wage Rates Rise Faster Than the Increase in Labour