Final answer:
The correct answer is option b. nominal, below.
Step-by-step explanation:
The student's question pertains to the idea that inflation can have benefits by possibly increasing the demand for labor if wage rates do not rise as quickly as prices, thus effectively reducing real wages. This condition would indicate that employment might increase because the nominal wage becomes fixed below the equilibrium level. In essence, this is due to sticky wages and the substitution effect that makes labor relatively cheaper for employers as inflation reduces the purchasing power of wages, hence employers may demand more labor.
However, this scenario only works if nominal wages are sticky downwards and fail to rise with price levels. When employers fail to increase nominal wages, the real wages fall, increasing the demand for labor, as more workers are willing to work for the relatively lower real wages.
Inflation can also make wages more flexible, as moderate inflation can erode the purchasing power of wages without nominal wages needing to be cut, which is often resisted by workers. This erosion of real wages can help firms in adjusting their labor costs and could potentially reduce unemployment that arises from downwardly sticky wages.
It is important to note that this phenomenon primarily occurs in the short term, and over the long term, labor markets typically adjust as wage contracts are renegotiated.