If nominal wages are contractually fixed and cannot change in the short run, then an unexpected decline in the inflation rate reduces business revenues and lowers the unemployment rate.

Question

Quizplus · Accepted Answer

An unexpected decline in the inflation rate, when nominal wages are fixed, increases the real wage (since the purchasing power of the wages increases). This can lead to businesses reducing their workforce to cut costs, potentially increasing the unemployment rate, not lowering it.

If Nominal Wages Are Contractually Fixed and Cannot Change in the Short