Question

If nominal wages fall which of the following will occur in the short run? The SRAS curve will shift to the right The SRAS curve will shift to the left The AD curve will shift to the right The LRAS curve will shift to the right

Answer 1

Answer:

The SRAS curve will shift to the right.

Explanation:

A decline in nominal wages will reduce the cost of hiring labor. The overall cost of production will reduce as well. The firms will be able to increase production and investment.  

This increase in production and investment will increase the aggregate supply. As a result, the short-run aggregate supply curve will move to the right. This will cause the equilibrium price to fall and the equilibrium quantity to increase.