Suppose that there is an increase in the costs of production that shifts the short-run aggregate supply curve left.If there is no policy response,then eventually
A)because unemployment is low,wages will be bid up and short-run aggregate supply will shift right.
B)because unemployment is low,wages will be bid down and short-run aggregate supply will shift right.
C)because unemployment is high,wages will be bid up and short-run aggregate supply will shift right.
D)because unemployment is high,wages will be bid down and short-run aggregate supply will shift right.

Question

Quizplus · Accepted Answer

When there is an increase in costs of production that shifts the short-run aggregate supply curve left, prices will rise and firms will produce less output. This will lead to higher unemployment and lower wages since there will be a surplus of labor. As a result, wages will be bid down and, eventually, short-run aggregate supply will shift right as firms adjust their expectations and lower their production costs to accommodate the new economic conditions. Hence, option D is the correct answer.

Suppose That There Is an Increase in the Costs of Production