Question

Explain why the nominal wage rate is a function of expected price

Answer 1

Solution:-The nominal wage rate is a function of expected price.Here mainly nominal wages are affected by price expectations.Nominal wagesdo not equal the real wage. Workers and companies set nominal wages basedon their expectations in the price level Pe.A higher unemployement weaken workers’ bargaining power because firmscan find the new employee who is suitable with the firm. They have manychoices when the unemployement rate is increasing. An increaseunemployement rate leads to deacrease in the nominal wage. Because thehigher unemployement rate allows firms to pay lower wages and still keepworkers willing to work.