An economy experiences a sudden surge in aggregate demand, leading to a significant increase in both production and the number of people employed. Assuming firms in this economy consistently set their prices as a fixed percentage markup over their labor costs, what will be the direct impact of this economic expansion on the real wage implied by their pricing behavior?

Price-Setting Behavior in an Economic Boom

In an economy where firms determine prices by applying a constant percentage markup over their labor costs, a severe recession that causes a sharp decline in overall production and a rise in unemployment will lead to a decrease in the real wage as determined by this price-setting behavior.

Innovate Corp.'s Wage and Pricing Decisions

An economy's central bank lowers interest rates, causing a surge in investment and consumer spending. As a result, firms increase production to meet the higher demand. Assuming firms in this economy set their prices as a consistent markup over their labor costs, match each economic variable below with its resulting change in this new economic environment.