If wages and prices are flexible and expectations are formed rationally, an increase in the money supply will cause
A) real wages to rise.
B) real wages to fall.
C) nominal wages to rise.
D) nominal wages to fall.

Question

Quizplus · Accepted Answer

In a scenario where wages and prices are flexible and expectations are formed rationally, an increase in the money supply would lead to an increase in nominal wages as employers adjust wages upwards in response to the higher price levels anticipated due to the increased money supply. Real wages might not necessarily rise because the increase in nominal wages could be offset by an increase in prices.

If Wages and Prices Are Flexible and Expectations Are Formed