Choice "A" is correct. An increase in nominal wages represents an increase in input costs. This would shift the aggregate supply curve to the left resulting in a decrease in real GDP and an increase in the overall price level. Note that the increase in input costs raises the price level from P0 to P1; thus, the price level increases. Graphs, such as the one above, are a great worksheet methodology to visually arrive at or verify your conclusions.Choice "b" is incorrect. Real GDP would decrease, not increase.
Choice "c" is incorrect. The price level would increase, not decrease.
Choice "d" is incorrect. Real GDP would decrease, not increase.
