Unanticipated deflation can create unemployment if
A)nominal wages are sticky, causing real wages to rise over time.
B)nominal wages are flexible, causing people's real incomes to decline.
C)banks refuse to make loans at low nominal interest rates.
D)nominal interest rates remain positive.

Question

Quizplus · Accepted Answer

If nominal wages are sticky, they will not adjust immediately to the fall in prices, so the real wage rate would increase. This makes the cost of production for firms more expensive, leading to a reduction of output and employment.

Unanticipated Deflation Can Create Unemployment If