[NinaSun]

A large increase in nominal wages, perhaps orchestrated by unions, would most likely result in:

a. An increase in real GDP and an increase in the price level

b. A decrease in real GDP and an increase in the price level

c. An increase in real GDP and a decrease in the price level

d. A decrease in real GDP and a decrease in the price level

The answer is b. Why not consider the increase of wage indicates a increase of wealth, which will trigger demand and increase GDP and price level?

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[ohiostategirlcpa]

They consider the price of labor as a cost of input for industry, similar to the price of oil or other commodities. A supply shock to the economy would result in a decrease in GDP and inflation simultaneously (the worst of both worlds).

Obviously the price of labor (such as the minimum wage) is controversial. Liberal economists would take your point of view.

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