When the price level rises and the money wage rate does not change,
A)existing businesses do not change their level of output.
B)the quantity of real GDP supplied decreases as more businesses fail and potential GDP does not change.
C)profits fall and more businesses fail.
D)the quantity of real GDP supplied increases as more businesses start up and potential GDP does not change.
E)the quantity of potential GDP increases because the quantity of real GDP supplied increases.

Question

Quizplus · Accepted Answer

When the price level rises and the money wage rate does not change, businesses experience higher profits because their costs remain the same while their revenues increase. This incentivizes businesses to increase production, leading to an increase in the quantity of real GDP supplied. Potential GDP, however, remains unchanged as it is determined by factors such as technology and resources, not by price levels.

When the Price Level Rises and the Money Wage Rate