Question

If the real wage needs to decrease to restore equilibrium in a labor​ market, this can happen by

A.keeping the nominal wage constant and allowing deflation to allow the real wage to decline.

B.raising the nominal wage so long as there is no inflation occurring in the economy.

C.keeping the nominal wage constant and allowing inflation to allow the real wage to decline.

D.raising the nominal wage and allowing deflation to allow the real wage to decline.

If actual inflation is lower than expected​ inflation,

A.there is a redistribution of wealth from lenders to borrowers.

B.there is a redistribution of wealth from borrowers to lenders.

C.there is no redistribution of​ wealth, but the total wealth in the economy decreases.

D.there is no redistribution of​ wealth, but the total wealth in the economy increases.

Answer 1

1. Option C.

• If firms wish real wages to decline in order to restore it to the equilibrium, then this can happen if the nominal wage is kept constant.
• We know that real wage is the wage without considering the effects of inflation.
• When inflation is introduced into the economy, the real wage will naturally decline and restore to the equilibrium level.

2. Option B.

• When the actual inflation is lower than the expected inflation then the wealth is redistributed from borrower's to lender's.
• This makes the lenders or creditor's better off than the borrower's or debtor's.
• This is because, the real value of debt Increases when actual inflation falls low.