If nominal wage rates are contractually determined and cannot change in the short run, then an unexpected increase in the inflation rate will:
A)increase business profits and reduce the unemployment rate.
B)reduce both business profits and the unemployment rate.
C)reduce business profits and increase the unemployment rate.
D)increase both business profits and the unemployment rate.
E)cause no change in business profits or the unemployment rate

Question

Quizplus · Accepted Answer

An unexpected increase in inflation reduces the real wage (since nominal wages are fixed), leading to higher business profits and potentially lower unemployment as firms hire more due to lower labor costs.

If Nominal Wage Rates Are Contractually Determined and Cannot Change