When self-correction works to eliminate an expansionary gap, how are money wages and real wages affected?
A) Money wages increase, and real wages increase.
B) Money wages increase, and real wages decrease.
C) Money wages decrease, and real wages decrease.
D) Money wages decrease, and real wages increase.

Question

When self-correction works to eliminate an expansionary gap, how are money wages and real wages affected?  
A) Money wages increase, and real wages increase. 
B) Money wages increase, and real wages decrease. 
C) Money wages decrease, and real wages decrease. 
D) Money wages decrease, and real wages increase.

Quizplus · Accepted Answer

When self-correction works to eliminate an expansionary gap, firms respond to the high level of demand (and possibly to the rising costs of inputs) by raising prices. Workers, seeing the cost of living increase, demand higher money wages. As firms accommodate these wage demands, their costs of production increase, leading them to raise prices further. Although money wages increase, the real wages (which are adjusted for inflation) may actually decrease because the prices of goods and services increase at a faster rate than money wages.

When Self-Correction Works to Eliminate an Expansionary Gap, How Are