Consider the basic AD/AS model. A rise in an input price like unit labour costs would be expected to create a new macroeconomic equilibrium, which in comparison to the original equilibrium, has a price level that is
A)higher and a real GDP that is lower.
B)lower and a real GDP that is lower.
C)lower and a real GDP that is higher.
D)higher and a real GDP that is the same.
E)higher and a real GDP that is higher.

Question

Quizplus · Accepted Answer

An increase in unit labour costs would shift the short-run aggregate supply (SRAS) curve upward and leftward, leading to a higher price level and a lower real GDP in the new macroeconomic equilibrium. This is because the increase in input costs would make it more expensive for firms to produce goods and services, leading to a decrease in their willingness to supply them at any given price level. The result is a contractionary effect on the economy, as higher prices lead to lower consumption and investment, causing a decrease in real GDP.

Consider the Basic AD/AS Model