An unexpected increase in the price level that temporarily lowers real wages and induces more employment and output in an economy,occurs in
A)nominal-supply theory.
B)stagflation.
C)misperceptions theory.
D)sticky-wage theory.

Question

Quizplus · Accepted Answer

This is a classic example of the sticky-wage theory, which suggests that nominal wages are slow to adjust to changes in the price level. In this scenario, an unexpected increase in the price level leads to a temporary decrease in real wages, which incentivizes firms to hire more workers and increase output in the short run.

An Unexpected Increase in the Price Level That Temporarily Lowers