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Eduncle posted an MCQ
October 20, 2019 • 16:25 pm 0 points
  • UGC NET
  • Economics

Which of the following would be the initial impact on an economy if wages were to increase more than workers productivity ?

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    Eduncle Best Answer

    Economists agree that a decrease in short run aggregate supply will raise the price level, whereas an increase in short run aggregate supply will lower the price level. For example, a rise in the cost of imported raw materials will raise firms’ costs of production. This will shift the SRAS curve to the left and push up the price level and reduce output.
    Effects of a Shift in Long Run Aggregate Supply
    There is again disagreement among new classical and Keynesian economists about the effects of a shift of the long run aggregate supply curve. New classical economists argue that an increase in long run aggregate supply will cause the economy to move to a new equilibrium position with a higher output and lower price level.
    Keynesians, however, argue that it again depends on where the initial equilibrium position is. If the economy is operating at or near the full employment level, then an increase in LRAS will be likely to reduce the price level and increase output. However, if the economy is operating at  a low level of economic activity, the increase in LRAS will increase the productive potential of the economy but the lack of aggregate demand will mean that it will not be used and output will remain at Y. Fig. shows the LRAS curve moving to the right but the price level and output staying at their initial levels.
    These are again unanticipated internal and external events but this time ones that affect aggregate supply. For example, if key groups of worker gain a pay rise this may spread to other groups. Wage costs will rise and the short run aggregate supply curve will shift to the left and the price level will rise.

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