According to the sticky-wage theory, which statement is consistent with an unexpected increase in the price level?
A) The real wage rises, and employment rises.
B) The real wage rises, and employment falls.
C) The real wage falls, and employment rises.
D) The real wage falls, and employment falls.

Question

Quizplus · Accepted Answer

The sticky-wage theory suggests that nominal wages are slow to adjust to changing economic conditions. If the price level unexpectedly increases, nominal wages initially remain the same, leading to a decrease in real wages (since the purchasing power of these wages falls). Lower real wages make labor cheaper for firms, which then tend to hire more workers, thus increasing employment.

According to the Sticky-Wage Theory, Which Statement Is Consistent with an Unexpected