Keyensian Model

In other words, the value of each dollar has risen. Nominal wages rise, for example, as soon as workers demand greater salaries since the cost level has risen. Of course, in theory they will demand sufficient of a raise to cover the improve in prices. For example, cost of living increases always attempt only to hold up with inflation.

As nominal wages rise, workers become much more willing to offer labor hours. This has the effect of increasing employment during the economy for 2 reasons. First, true wages tend to rise much more slowly than nominal wages. Wage increases set to cover only cost of living increases might give workers the perception that the At the same time, in true terms, workers are willing to offer additional labor mainly because for each true wage level they perceive that they're earning more. Thus, an improve during the nominal wage rate has the effect of increasing employment. y have been given a raise.

However, if the cost of living improve covers only the improve in cost level, actual wages have not changed. If these price of living increases don't cover the full increase inside price level (due to some unexpected shock for instance), then genuine wages have actually dropped.

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