If workers realize that an increase in nominal wage rates also constitutes a rise in real wages, then we would expect an increase in employment and an upward movement along the short-run Phillips curve.

Question

Quizplus · Accepted Answer

If workers understand that an increase in nominal wage rates is accompanied by an increase in purchasing power, which increases their real wages, then they are less likely to demand higher wages in the future. This reduces the upward pressure on inflation and leads to lower unemployment, which causes an upward movement along the short-run Phillips curve.

If Workers Realize That an Increase in Nominal Wage Rates