If the money wage rate rises relative to the price level, firms the quantity of labor they demand and workers the quantity of labor they supply.

Question

Quizplus · Accepted Answer

If the money wage rate rises relative to the price level, then the real wage rate (the purchasing power of wages) decreases. Firms will decrease the quantity of labor they demand because the cost of hiring workers has increased. Conversely, workers will increase the quantity of labor they supply because the real value of their wages has decreased, and they may need to work more hours to maintain their standard of living. Therefore, the correct choice is A where both firm demand and worker supply of labor will decrease.

If the Money Wage Rate Rises Relative to the Price