During 2018, a country reports that its price level fell and the money wage rate did not change. These changes led to
A) no change in the real wage rate and an increase in aggregate demand.
B) a lower real wage rate, lower profits, and a decrease in the quantity of real GDP supplied.
C) a higher real wage rate, higher profits, and an increase in the quantity of real GDP supplied.
D) a higher real wage rate, lower profits, and a decrease in the quantity of real GDP supplied.
E) a lower real wage rate, higher profits, and an increase in the quantity of real GDP supplied.

Question

Quizplus · Accepted Answer

When the price level falls and the money wage rate does not change, the real wage rate (the wage rate adjusted for inflation) increases because workers' wages buy more goods and services than before. This can lead to lower profits for businesses, as their labor costs relative to their selling prices increase. Consequently, businesses may reduce production, leading to a decrease in the quantity of real GDP supplied.

During 2018, a Country Reports That Its Price Level Fell