# Economics' question

an unanticipated reduction in short-run aggregate supply is likely to be accompanied by: a- an increase in real GDP. b- a decrease in the real rate of interest. c- an increase in the price level. okay its a silly question, the answer is C. but because my weak point is macroeconomics, though i find it interesting, i read the explanations of the wrong answers to better understand the material. my problem here is with B, explanation: a decrease in the nominal interest rate may follow immediately, but the real interest rate may not be affected. the way i analyzed it was this: a decrease in aggregate supply, upward shift n to the left, general price level increases, a movement along the aggregate demand curve, negative income effect of higher prices therefore ppl will require higher interest rates to compensate for the decrease in their wealth. would there be a decrease in wealth?! and would there be a subsequent shift in aggregate demand?! why would nominal and real interest decrease?! this my problem i cant tell what causes real wage increase/decrease vs nominal wage increase/decrease, and real interest rate increase/decrease vs nominal interest rate increase/decrease. if anyone can help me with a comprehensive explanation i would be grateful. thanks in advance

Just draw the AS-AD diagram, move the supply curve to the left (decrease). You’ll see that price levels will increase from equilibrium.

The part with the LRAS/SRAS/Phillips Curve is actually mind boggling. Your question brings two things in my mind. 1. SRAS shifting to the left increases price level or in other words INFLATION 2. Nominal Interest Rate= Real Interest Rate + Inflation Premium 3. So when Inflation increases, Nominal Interest Rates increase as people demand compensation for higher cost of living. I dont think that this still clears your problem absolutely. I would tend to believe that (not 100% sure) Real Interest Rates would only change due to change in the Demand and Supply of Loanable Funds in the Money Market (Remember the diagram with the Vertical Money Supply Curve and a Downward sloping Demand Curve). Now coming to the Real/Nominal wage increase/decrease problem. This is much easier. 1. Suppose your Salary Increased by 10% this year. Inflation was 6% this year. 2. This means that your Nominal Wage increased by 10%. 3. But in REALITY your wages only increased by (10%-6%)=4%. Why did this happen? Because everything that you buy now costs 6% more. Hope this clears.

kh.asif thanks man really appreciate, it clears much of what i was missing, i guess i’m dryin out with all the studying…