The following diagram shows two economies, \(A\) and \(B\). Each are in short-run equilibrium at point \(E\), where the \(A D\) and \(A S\) curves intersect.

a. Explain why in Economy \(A\) wages and other factor prices will begin to rise, and why this will increase firms' unit costs.

b. Following your answer in part (a), show the effect on the \(A S\) curve. Explain what happens to real GDP and the price level.

c. Explain why in Economy \(B\) wages and other factor prices will begin to fall, and why this will decrease firms' unit costs.

d. Following your answer in part (c), show the effect on the \(A S\) curve. Explain what happens to real GDP and the price level.

Transcribed Image Text:

Price Level E Y+ Real GDP Economy A AD AS