Suppose that the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve. If government spending increases, then in the short run, the _____ will fall. However, in the long run, the _____ wage will rise.
A) nominal wage; real
B) output; real
C) real wage; nominal
D) price level; nominal

Question

Quizplus · Accepted Answer

In the short run, an increase in government spending shifts the aggregate demand curve to the right, leading to higher output and prices. This can reduce the real wage (wage adjusted for inflation) as prices rise faster than nominal wages. In the long run, as the economy adjusts, nominal wages will rise in response to the higher price levels, restoring the real wage to its original level.

Suppose That the Short-Run Macroeconomic Equilibrium Occurs in the Upward-Sloping