According to the sticky-wage theory, which statement is consistent with an unexpected fall 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 when the price level falls unexpectedly, nominal wages do not adjust downward immediately due to contracts, worker morale, and other factors. As a result, the real wage (the wage adjusted for inflation) increases because the nominal wage remains the same while the price level decreases. Higher real wages make labor more expensive for firms, leading to a reduction in the quantity of labor demanded, hence employment falls.

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