Question

When the price level and the money wage rate rise by the same percentage, unemployment

O A. is eliminated
O B. decreases
O c. increases
O D. remains the same
1
.
11
.

Answer 1

D. remains the same

Step-by-step explanation:

• When price levels (let's call it "P") and money wage rate (or nominal wage, let's call it "W") increase in the same percentage, the real wage, we can be thougth as the units of wage in terms of purchase power (and it its deifned by
  `w=(W)/(P)`) does not change, therefore, unemployment does not change either, because incentives to hire more units of labor do not change .
• To see it more clearly, let's suppose you own a firm. When price levels increase, the price of your product increases (on average) the same percentage than the general price level :
  `\triangle{P}\%`. If money wage rate increases by
  `\triangle{W}\%`, then you should pay your employees
  `\triangle{W}\%` more.
• When
  `\triangle{P}\%=\triangle{W}\%`, your expending (
  `\triangle{W}\%`) is growing at the same rate that your incomes (
  `\triangle{P}\%`), then you have no incentives to hire more employers.
• On the other hand,
  `\triangle{W}\%<\triangle{P}\%` would mean that your expenses (because of salaries) are growing at a lower rate than your incomes, making it more attractive to you to hire more people, because the cost you pay for hiring these new people is lower than the benefits they produce. This situation would actually lower unemployent rates.