Draw the graph · Macro · Aggregate demand and aggregate supply
Workers expect higher inflation
Drag a curve sideways, or use its arrows. A curve you do not move is a curve you are saying stays put. Make each shift clear enough that a reader could see it.
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Aggregate demand stays put. Short-run aggregate supply shifts left. Long-run aggregate supply stays put.
Nominal wages are the largest cost for most firms. When wages rise at every level of output, firms supply any given output only at a higher price level, so SRAS shifts left. AD is unchanged. LRAS is unchanged because the economy's real capacity is the same.
The price level rises and real GDP falls, opening a recessionary gap.
Common mistake. Some students shift AD right because 'workers have more money to spend.' The stem says spending plans are unchanged. Higher wages here are a cost to firms, which is a supply shift.
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Lesson: Aggregate Supply