Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, decreasing short-run aggregate supply.

Question

BlackTom AI · Accepted Answer

When output is above the natural rate level, firms demand more labor, so wages will begin to rise, which raises production costs and decreases short-run aggregate supply.

1) Relevant knowledge points and concepts
- Natural rate of output: level of real GDP consistent with stable inflation and "natural" unemployment (no cyclical unemployment).
- Labor market response: output above natural rate implies unemployment below its natural level, creating upward pressure on wages.
- Short-run aggregate supply (SRAS): depends on nominal wages and production costs; higher nominal wages increase firms’ marginal costs and shift SRAS left (a decrease in SRAS).
- Sticky wages/prices: in the short run, wages adjust gradually, but sustained output above natural rate leads to rising wage demands.

2) Step-by-step reasoning
- Step 1: Output > natural rate → labor demand exceeds supply at current wages → unemployment falls below the natural rate.
- Step 2: With tighter labor markets, workers/bargaining agents push for higher nominal wages; firms must pay more to attract/retain workers.
- Step 3: Higher nominal wages raise firms’ unit labor costs, reducing profitability at any given price level.
- Step 4: To restore profits, firms either raise prices or reduce quantity supplied at existing prices; in aggregate, this manifests as a leftward shift (decrease) in the SRAS curve.
- Therefore: when output is above the natural rate, wages rise, decreasing SRAS.

3) Calculations
- No numeric calculation is required; the logic is comparative statics based on supply/demand in labor and cost effects on SRAS.

4) Why the correct answer is correct
- “Above; rise” matches the causal chain: above-natural output → tighter labor market → wages rise → SRAS decreases.

5) Why the other options are incorrect
- a. “below; rise”: if output is below natural, unemployment is higher and wages tend to fall, not rise.
- b. “above; fall”: contradicts labor-market mechanics; above-natural output causes wages to rise, not fall.
- c. “below; fall”: while below-natural output does lead to falling wages, falling wages would increase SRAS (shift right), not decrease it as the question states.

Conclusion: The correct choice is d. above; rise, which matches the provided answer.

Everything else held constant, when output is the natural rate level, wages will begin to , decreasing short-run aggregate supply.Single choice

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Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, decreasing short-run aggregate supply.Single choice