Question

If the price of labor (wages) decreases, how will this affect SRAS and LRAS curves?

A. SRAS will shift right, LRAS will not be affected

B. SRAS and LRAS will both shift right

C. LRAS will shift right, LRAS will not be affected

D. This will have no effect on LRAS or SRAS

Answer 1

If the price of Labour (wages) Decreases, then it means that the cost of production in the economy has gone down. This will lead to an increase in the aggregate supply in the economy. Therefore the SRAS curve will shift right. But there will be no impact on the LRAS curve.

LRAS curve shifts whenever:

• Technological advancements happen.
• Long-term inward investment happens.
• Quantity and quality of human capital increases.
• Competition increases which improves efficiency.

So here, LRAS Curve will not be affected.

Therefore, if the price of Labour (wages) decreases, SRAS Curve will shift to the right but LRAS will not be affected.

Hence, option A is correct.