Draw the graph · Macro · Aggregate demand and aggregate supply
Nationwide wage agreements
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.
Wages are the largest cost of production. When wages rise with no gain in productivity, 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 has not moved.
The price level rises and real GDP falls, opening a recessionary gap.
Common mistake. Some students shift AD right because 'workers earn more.' Higher wages that outrun productivity are a cost shock. On the exam, that is a leftward shift of SRAS.
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Lesson: Aggregate Supply