Final answer:
An increase in wage rates raises the cost of labor, leading to a leftward shift in the aggregate supply curve, and therefore, aggregate supply (AS) may decrease, which represents the correct answer to the student's question.
Step-by-step explanation:
When wage rates increase, this increases the cost of labor, which is an important input in the production process. According to the aggregate demand/aggregate supply (AD/AS) model, an increase in the price of a key input, such as labor, will typically cause the aggregate supply curve (AS) to shift to the left. This shift to the left indicates a reduction in the total quantity of goods and services that firms are willing and able to produce at every price level, hence aggregate supply (AS) may decrease.
The correct answer to the question is therefore 'a. aggregate supply (AS) may decrease.' This leftward shift can lead to higher prices and lower output in the economy, which is sometimes referred to as stagflation. The other options, concerning aggregate demand (AD), are not directly affected by a rise in wage rates, so the impact on AD would be secondary and not the immediate consequence of increased wages.