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

Question

Quizplus · Accepted Answer

When the price level rises relative to the money wage rate, firms find it more profitable to produce because the real cost of labor decreases, leading them to increase the quantity of labor they demand. However, workers see their real wages decrease (since their nominal wages buy less due to higher prices), which may discourage them from supplying as much labor, hence they decrease the quantity of labor they supply.

If the Price Level Rises Relative to the Money Wage