The presence of a minimum wage might lead to some people consuming both a higher quality as well as a higher quantity of goods. As such, aggregate demand (AD) increases to AD', intersecting with the long term aggregate supply (AS) to the right of the intersection between the original AD and the short term aggregate supply (AS). This causes price level to increase as a result in the increase in AD, resulting in a demand-pull inflation.
With the introduction of a minimum wage, producers will pass on the increase in costs of wages to the consumers, especially for goods that are demand price inelastic. Alternatively, there might be a decrease in the aggregate supply, where the short run aggregate supply (AS) shifts to the left to AS' and intersects to the left of the intersection between the long term AS and original AD, thus resulting in inflation in the short run.
|