With sticky nominal wages a monetary expansion causes:
A) real wages to rise
B) the price level to rise
C) nominal wages to fall
D) real interest rates to rise
E) None of these answers are correct.

Question

Quizplus · Accepted Answer

With sticky nominal wages, a monetary expansion leads to an increase in the money supply which allows for an increase in aggregate demand. However, since nominal wages are fixed, firms cannot increase wages immediately, resulting in a short-term increase in output and employment, but also an increase in prices. This means that the price level will rise and the purchasing power of money will decline.

With Sticky Nominal Wages a Monetary Expansion Causes