The expectations-augmented Phillips curve implies that as expected inflation increases,nominal wages ________ to prevent real wages from ________.
A)fall;rising
B)fall;falling
C)rise;falling
D)rise;rising

Question

Quizplus · Accepted Answer

According to the expectations-augmented Phillips curve, when expected inflation increases, workers will expect higher wages to compensate for the increase in prices. As a result, nominal wages will rise. This increase in wages will cause firms to increase prices to maintain their profit margins, and as a result, inflation will also rise, preventing real wages from falling. Therefore, as expected inflation increases, nominal wages rise to prevent real wages from falling.

The Expectations-Augmented Phillips Curve Implies That as Expected Inflation Increases,nominal