With sticky nominal wages, a monetary expansion causes real wages to fall.

Question

Quizplus · Accepted Answer

Sticky nominal wages imply that nominal wages do not adjust immediately to changes in prices or inflation. Therefore, if there is a monetary expansion which results in an increase in prices or inflation, real wages (i.e. nominal wages adjusted for inflation) will fall in the short run. This is because the increase in nominal wages will not be enough to keep up with the rise in prices, leading to a decrease in purchasing power and therefore, lower real wages.

With Sticky Nominal Wages, a Monetary Expansion Causes Real Wages