If a decrease in the short run aggregate supply leads to stagflation, what will happen to the real wages in long run?

Expert Answers

An illustration of the letter 'A' in a speech bubbles

In the long run, classical economic theory says that real wages will return to the equilibrium that existed before the decline in short run aggregate supply.  This will generally happen when the government stops intervening in the economy as much as it had been.  Classical economists would argue that stagflation only takes place when the government intervenes excessively by, for example, imposing taxes that are too high and regulations that are too onerous.  When these interventions are removed, the economy will be able to run on its own again and supply will go back up, allowing wages to return to normal.  To classical economists, this is what happened with Reaganomics in the 1980s. 

Approved by eNotes Editorial Team

Posted on

Soaring plane image

We’ll help your grades soar

Start your 48-hour free trial and unlock all the summaries, Q&A, and analyses you need to get better grades now.

  • 30,000+ book summaries
  • 20% study tools discount
  • Ad-free content
  • PDF downloads
  • 300,000+ answers
  • 5-star customer support
Start your 48-Hour Free Trial