Other things constant, if the cost of labor goes down, the profits of firms will
A) increase, and short-run aggregate supply will shift to the right.
B) fall, and short-run aggregate supply will shift to the left.
C) increase, and long-run aggregate supply will shift to the right.
D) fall, and long-run aggregate supply will shift to the left.

Question

Quizplus · Accepted Answer

If the cost of labor goes down, firms will be able to produce goods and services at a lower cost, resulting in higher profits. This will cause firms to increase production and shift the short-run aggregate supply curve to the right. In the long run, lower labor costs may lead to investments in capital and technology and increase in productivity, leading to a shift in the long-run aggregate supply curve to the right.

Other Things Constant, If the Cost of Labor Goes Down