What is the correct statement regarding the relationship between inflation and real wages? （What is the impact of inflation on real wages?）A.Inflation always reduces real wages in both the short run and the long run.B.Inflation only reduces real wages in the long run when nominal wages are fixed.C.Inflation reduces real wages in the short run when nominal wages are fixed by contracts, but in the long run, real wages are determined by labor supply and the marginal product of labor.D.Inflation has no impact on real wages in either the short run or the long run.
Question
What is the correct statement regarding the relationship between inflation and real wages? （What is the impact of inflation on real wages?）A.Inflation always reduces real wages in both the short run and the long run.B.Inflation only reduces real wages in the long run when nominal wages are fixed.C.Inflation reduces real wages in the short run when nominal wages are fixed by contracts, but in the long run, real wages are determined by labor supply and the marginal product of labor.D.Inflation has no impact on real wages in either the short run or the long run.
Solution
The correct statement regarding the relationship between inflation and real wages is C. Inflation reduces real wages in the short run when nominal wages are fixed by contracts, but in the long run, real wages are determined by labor supply and the marginal product of labor.
Here's why:
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In the short run, if nominal wages (the dollar amount workers receive) are fixed due to contracts and inflation rises, the purchasing power of these wages decreases. This means workers are effectively earning less, because their wages buy less than before. This is a reduction in real wages (wages adjusted for inflation).
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In the long run, however, real wages are determined by factors like labor supply (how many workers are available) and the marginal product of labor (how much
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