In the AD/AS framework, an unexpected increase in the money supply and a resulting increase in aggregate demand, causes nominal wages
A)to remain unchanged.
B)to decrease.
C)to start to rise, but at a slower rate than prices.
D)to fluctuate wildly.

Question

Quizplus · Accepted Answer

An unexpected increase in the money supply causes an increase in aggregate demand which leads to a temporary increase in real GDP and a rise in prices. As prices increase, firms may raise nominal wages to compensate workers for the increased cost of living, but this adjustment takes time. In the short run, nominal wages may remain unchanged or increase at a slower rate than prices, causing a decline in real wages. Therefore, Choice C is the best answer.

In the AD/AS Framework, an Unexpected Increase in the Money