According to the sticky-wage theory, which statement is consistent with a more-than-expected increase in the price level?
A) Real wages rise, so firms will hire more workers.
B) Real wages rise, so firms will hire fewer workers.
C) Real wages fall, so firms will hire more workers.
D) Real wages fall, so firms will hire fewer workers.

Question

Quizplus · Accepted Answer

The sticky-wage theory suggests that when the price level increases more than expected, nominal wages (which are slow to adjust) do not keep up, leading to a decrease in real wages. As a result, labor becomes cheaper for firms, encouraging them to hire more workers.

According to the Sticky-Wage Theory, Which Statement Is Consistent with a More-Than-Expected