If the government implements a new, more stringent minimum wage law, we would expect the _______ aggregate supply curve to shift to the _______.
A) long-run; left
B) long-run; right
C) short-run; left
D) short-run right

Question

Quizplus · Accepted Answer

When the government implements a more stringent minimum wage law, it will increase the cost of labor for firms, which will lead to an increase in their costs of production. In the short run, firms are limited in their ability to adjust their production processes, so they will have to pass these increased costs onto consumers in the form of higher prices. This causes a leftward shift in the short-run aggregate supply (SRAS) curve. Over time, however, firms can adjust their production processes to be more efficient or to substitute capital for labor, which enables them to produce more output at lower cost. This causes the long-run aggregate supply (LRAS) curve to shift to the left, thereby reducing the impact of the initial increase in the minimum wage on prices and output.

If the Government Implements a New, More Stringent Minimum Wage