Suppose that product prices start rising but nominal wages do not. In that case,
A) real wages will fall and firms will want to produce more because doing so will be profitable.
B) real wages will rise and firms will want to produce more because doing so will be profitable.
C) there will be a surplus of goods and services produced.
D) there will be a shortage of goods and services produced.

Question

Quizplus · Accepted Answer

If product prices rise but nominal wages do not, then real wages will fall. Since real wages have decreased, workers will demand less goods and services. However, firms will want to produce more because the higher prices mean they can make more profit per unit. The result is a situation where there is a surplus of goods and services produced.

Suppose That Product Prices Start Rising but Nominal Wages Do