According to the sticky wage theory, which of the following is consistent with an unexpected fall in the price level?
A)The real wage rises and employment rises.
B)The real wage rises and employment falls.
C)The real wage falls and employment rises.
D)The real wage falls and employment falls.

Question

Quizplus · Accepted Answer

According to the sticky wage theory, the nominal wage rate is fixed in the short run. Therefore, an unexpected fall in the price level results in a higher real wage rate. This, in turn, leads to higher unemployment as firms do not experience a reduction in labor costs and reduce their demand for labor. Therefore, the correct answer is B, where the real wage rate rises and employment falls.

According to the Sticky Wage Theory, Which of the Following