Question

If workers and firms expect that inflation will be 3 percent next year, and real wages are not changing over time, by how much will nominal wages increase?

A)		more than 3 percent
B)		less than 3 percent
C)		3 percent
D)		depends on actual inflation for next year

Answer 1

Solution:-Option C is correct

C.3 percent

Explaination:-If workers and firms expect that inflation will be 3 percent next year, and real wages are not changing over time, by how much will nominal wages increase 3 percent.For many years, both the rate of inflation and the rate of unemployment were higher than the Phillips curve would have predicted, a phenomenon known as “stagflation. Ultimately.This changes theinflation expectations of workers, who will adjust their nominal wages to meet these expectations inthe future.