Question

If overall labor wages increase, how will that affect the ad-as model?

a. the sras curve shifts to the right.
b. none of the alternatives is correct.
c. the sras curve and the lras curve shift to the left.
d. the lras curve shifts to the left.
e. the ad curve shifts to the right.

Answer 1

The correct answer is e. the ad curve shifts to the right.

Step-by-step explanation:

The correct answer is e. the ad curve shifts to the right.

In the AD-AS model, an increase in overall labor wages would cause an increase in production costs for businesses. This would lead to a shift in the short-run aggregate supply (SRAS) curve to the left, as higher labor costs decrease profitability and output. As a result, aggregate demand (AD) would also shift to the left, as consumers have less purchasing power due to higher prices. Therefore, the correct answer is that the AD curve shifts to the right.