Question

LAS 250 SAS 200 FO Price level (GDP deflator 2000 = 100) 150 OH E OK 100 50 50 0 8 9 10 11 Real GDP (trillions of 2000 dollars) In the above figure, which movement illustrates the impact of a constant price level and a rising money wage rate? 1) E to J 2) E to H 3) E to F 4) E to 1

Answer 1

The short-run aggregate supply(SAS) curve shifts as a result of any change in the production costs. If the production costs increase, the SAS curve shifts to the left and if the production costs decrease, the SAS curve shifts to the right.

A rising money wage rate increases the production costs and hence the SAS curve shifts to the left. If the price level is maintained constant before and after the shift, there exists an inflationary gap in the economy.

100) LAS SAS' 250 SAS 200 150 Price level (GDP deflator 2000 E 100 50 0 8 9 10 11 Real GDP (trillions of 2000 dollars)

Ans: 2) E to H