Question

Consider a country that is rapidly increasing its money supply. Briefly explain what is likely to be happening to real wages.

Answer 1

The Quantity Theory of Money indicates that price level in an economy changes in direct proportion to the change in money supply in that economy.

So, if a country is rapidly increasing its money supply then price level in that country will also increase at rapid rate.

As price level increases, the purchasing power of a given level of nominal wage decreases.

Purchasing power of a given level of nominal wage indicates real wage.

So, as price level increases, real wage decreases.

Thus,

If a country is rapidly increasing its money supply then in that case real wages in that country will decrease.