When the economy's actual price level exceeds the expected price level in the short run:
A)the real wages of workers decline.
B)the nominal wages of workers increase.
C)firms decrease output below the potential level.
D)the economy produces the natural rate of output.
E)cyclical unemployment in the economy falls to zero.

Question

Quizplus · Accepted Answer

When the actual price level exceeds the expected price level in the short run, firms find themselves selling their output at higher prices than anticipated. Since nominal wages (the amount of money workers are paid) are often set in advance through contracts or are slow to adjust, the real wages (the purchasing power of workers' earnings) decline. This makes labor effectively cheaper for firms, encouraging them to increase production, which is not directly related to changes in nominal wages, output levels in relation to potential, the natural rate of output, or cyclical unemployment levels in this specific context.

When the Economy's Actual Price Level Exceeds the Expected Price