The figure above shows the aggregate supply curve and potential GDP.
-Based on the figure above,the aggregate supply curve shifts rightward and the potential GDP line does not change when
A)the money wage rate rises.
B)the price level rises.
C)the money wage rate falls.
D)the price level falls.
E)both the price level and money wage rate rise by the same proportion.

Question

The figure above shows the aggregate supply curve and potential GDP.
-Based on the figure above,the aggregate supply curve shifts rightward and the potential GDP line does not change when
A)the money wage rate rises. 
B)the price level rises. 
C)the money wage rate falls. 
D)the price level falls. 
E)both the price level and money wage rate rise by the same proportion.

Quizplus · Accepted Answer

When the money wage rate falls, the cost of production decreases for firms. This leads to a decrease in the overall price level (as shown by a leftward shift of the aggregate supply curve). However, the potential GDP line does not change because it represents the maximum level of output that can be produced in the long run given the available resources and technology. Therefore, we see a rightward shift in the aggregate supply curve and no change in the potential GDP line.

The Figure Above Shows the Aggregate Supply Curve and Potential