Sia
Question
Statistics
Posted 10 months ago
Which of the following best describes how wages respond to changes in the price level in the long run?
Choose 1 answer:
(A) Wages fall when the price level rises and rise when the price level falls
(B) Wages do not change when the price level falls and rise when the price level rises
(C) Wages do not adjust to changes in the price level
(D) Wages do not change when the price level increases and wages fall when the price level decreases
(E) Wages fall when the price level falls and rise when the price level rises
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Answer from Sia
Posted 10 months ago
Solution by Steps
step 1
To understand how wages respond to changes in the price level in the long run, we refer to the concept of long-run equilibrium in the labor market
step 2
In the long run, wages are flexible and will adjust to changes in the price level to maintain equilibrium in the labor market. This is based on the classical dichotomy, which suggests that real variables, like employment, are not affected by nominal variables, like the price level, in the long run
step 3
Therefore, if the price level rises, wages will eventually rise as well, and if the price level falls, wages will eventually fall. This adjustment ensures that the real wage (the purchasing power of wages) remains relatively stable over time
Answer
E
Key Concept
Long-run wage flexibility
Explanation
In the long run, wages adjust to changes in the price level to maintain the purchasing power of wages and equilibrium in the labor market.
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