If workers and firms expect that inflation will be 3 percent next year,and real wages are not changing over time,by how much will nominal wages increase?

Question

Quizplus · Accepted Answer

Nominal wages will increase by the expected inflation rate of 3 percent. This is because workers will demand higher nominal wages to maintain their purchasing power in the face of expected inflation. Firms, in turn, will raise wages in order to retain their workers and attract new employees in a competitive labor market. Therefore, nominal wages will increase by the same magnitude as the expected inflation rate.

If Workers and Firms Expect That Inflation Will Be 3