**Question 3: Analyzing Wage Decrease on AD-AS Model**Suppose that we observe a decrease in wages. Which graph most accurately shows how this would affect the aggregate demand - aggregate supply model? Note that the new curve is shown in gray.**Diagrams:**- **Graph a: AS curve shifts right** - The graph shows two aggregate supply (AS) curves: the original AS curve in blue and the new AS curve in gray, shifted to the right. The aggregate demand (AD) curve is depicted in red.- **Graph b: AD curve shifts right** - The graph depicts two aggregate demand (AD) curves: the original AD curve in blue and the new AD curve in gray, shifted to the right. The aggregate supply (AS) curve is shown in red.- **Graph c: AS curve shifts left** - This graph illustrates the original AS curve in blue, with the new AS curve in gray shifted to the left. The AD curve remains in red.- **Graph d: AD curve shifts left** - The diagram features the original AD curve in blue, with the new AD curve in gray shifted to the left. The AS curve is represented in red.**Explanation:**In the context of a wage decrease, the aggregate supply curve typically shifts to the right, suggesting lower production costs, thus increasing supply. Therefore, the most accurate depiction in this scenario is Graph a, where the AS curve shifts to the right.

Wages refer to the remuneration or the amount of money which is received by the workers after they render their services. The wages are considered to be the award of the services rendered by the workers in an industry or firm. The fluctuation or an increment or decrement in wages shift the aggregate demand and supply curves.Option a is correct Option a is correct because a decrease in the wages will lead to an increase in the short-run aggregate supply curve because with the decrease in the wages, the firms will be able to produce more and will incur less costs. Option b is incorrect because a decrease in the wages will not affect the demand curve as the people have the power to shift it. Option c is incorrect because with a decrease in the wages, the Aggregate supply curve will not shift leftward because this will reduce the supply. Option d is incorrect because the decrease in the wages will not affect the aggregate demand curve.Hence, the wages are considered to be a determining factor and have others as well and so it will affect the aggregate supply curve.

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3. Suppose that we observe a decrease in wages. Which graph most accurately shows how this would affect the aggregate demand - aggregate supply model? Note that the new curve is shown in gray. a. AS curve shifts right: b. AD curve shifts right:

3. Suppose that we observe a decrease in wages. Which graph most accurately shows how this would affect the aggregate demand - aggregate supply model? Note that the new curve is shown in gray. a. AS curve shifts right: b. AD curve shifts right:

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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