How do changes in the money wage rate affect the LAS and SAS curves? Explain your answer
What will be an ideal response?
If the money wage rate changes, the LAS curve is not affected but the SAS curve shifts. For instance, if the money wage rate rises, the LAS curve does not change but the SAS curve shifts leftward. The difference occurs because moving along the LAS curve both the money wage rate and price level change in the same proportion. So in this case, a change in the money wage rate is matched by a change in the price level and firms have no incentive to change their production of goods and services. But moving along the SAS curve, only the price level changes. So when the money wage rate changes and the price level does not change, firms have an incentive to change their production. For instance, if the money wage rate rises and the price level does not change, then firms decrease their production of goods and services and the SAS curve shifts leftward.
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