Assuming a 5-percent decrease in both the nominal (money)wage and 5-percent increase in the price level in the classical model,then
A)both the quantity supplied and demanded of labor will increase.
B)the quantity supplied of labor will increase and the quantity demanded of labor will decrease.
C)both the quantity supplied and demanded of labor will decrease.
D)the quantity of labor supplied and demanded would remain constant.

Question

Quizplus · Accepted Answer

In the classical model, the labor market is assumed to clear, meaning that the quantity of labor supplied equals the quantity of labor demanded. A simultaneous decrease in the nominal wage and an increase in the price level would leave the real wage (the purchasing power of the wage) unchanged. Therefore, neither the quantity of labor supplied nor the quantity of labor demanded would change, as both are determined by the real wage.

Assuming a 5-Percent Decrease in Both the Nominal (Money)wage and 5-Percent