During 2014,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

A fall in the price level means that the nominal wage rate (the wage rate in current dollars) is now relatively higher than before. However, since the money wage rate (the wage rate in constant dollars) did not change, this means the real wage rate (the wage rate adjusted for inflation) has increased. With a higher real wage rate, firms may choose to produce less because their costs are higher (as labor costs make up a significant portion of their expenses). This results in a decrease in the quantity of real GDP supplied. Additionally, with lower prices, firms may also see decreased profits. Therefore, there is a higher real wage rate, lower profits, and a decrease in the quantity of real GDP supplied.

During 2014,a Country Reports That Its Price Level Fell and the Money