Question

Explain how each of following affects the SAS curve.

a) a fall in real wages

b) a fall in nominal wages

c) an equal rise in nominal wages and the price level

Explain how each of the following affects the shape and position of the AD curve.

d) an increase in the real money supply

e) an increase in the nominal money supply

f) an increase in the multiplier

Answer 1

a) With the decrease in real wages the aggregate demand for goods decreases which shifts the SAS curve to left
b) A decrease in the nominal wage rate lowers costs which increases profits and output. As the profits and output increases the SAS curve shifts to right
c) This increases the cost for firm which shifts the SAS curve to left
d) With the increase in real money, the price level would not get affected but the AD curve shifts to right
e) With an increase in the nominal money supply, there would be demand for goods which increases the price level and shifts the AD curve to right
f) With the increase in the multiplier and the government spending the AD curve shifts to right