If the money wage rate and the price level both rise by the same proportion,then in the figure above the potential GDP line ________,and the aggregate supply curve ________.
A)shifts rightward;does not shift
B)does not shift;shifts rightward
C)shifts rightward;shifts rightward
D)shifts rightward;shifts leftward
E)does not shift;shifts leftward

Question

Quizplus · Accepted Answer

If both the money wage rate and the price level rise by the same proportion, the real wage rate remains constant. This means that the short-run aggregate supply curve does not shift, as the level of potential GDP remains the same. However, the increase in the money wage rate leads to higher production costs, so firms must increase prices to maintain their profit margins. This causes the aggregate supply curve to shift leftward, resulting in a decrease in both real GDP and potential GDP.

If the Money Wage Rate and the Price Level Both