Answer to Question #283718 in Macroeconomics for ABEX

Question

19. Suppose the government of a typical developing country increased the salary of civil servants at a time when there is bumper harvest due to timely rainfall. What will happen to prices? show using your knowledge of AD-AS framework.

Answer 1

The prices will be low since the supply for the harvest is high in the market. Hence the demand will increase as workers tend to spend a high percentage of extra pay.