As the money wage rate rises,
A) the short-run aggregate supply curve shifts rightward.
B) the long-run aggregate supply curve shifts rightward.
C) both the long-run aggregate supply curve and the short-run aggregate supply curve shift leftward.
D) the short-run aggregate supply curve shifts leftward.

Question

Quizplus · Accepted Answer

An increase in the money wage rate leads to a decrease in the profit margins for firms, which causes them to reduce production in the short run. This results in a leftward shift of the short-run aggregate supply curve. However, in the long run, prices and inflation adjust to the new level of wages, and there is no change in the potential output of the economy. Hence, the long-run aggregate supply curve remains unchanged.

As the Money Wage Rate Rises