With a constant nominal wage, a higher-than-expected level of inﬂation in an economy _____.
A) will lead to a fall in real wages
B) will lead to a fall in employment
C) will reduce short-run output
D) will reduce the level of potential GDP

Question

Quizplus · Accepted Answer

When inflation is higher than expected, the purchasing power of nominal wages decreases, leading to a fall in real wages. This is because the same amount of nominal wage buys fewer goods and services than before due to the higher prices.

With a Constant Nominal Wage, a Higher-Than-Expected Level of Inﬂation