9. A general theory of wage determination can be expressed using the following e

Question

9. A general theory of wage determination can be expressed using the following equation where W is the aggregate nominal wage p is the expected price level u is the unemployment rate z is a catch-all variable reflecting other factors that affect wages An increase in the expected price level leads to an increase in the nominal wage since both workers and firms care about wages If we view wages as being determined by worker- employer bargaining, then lower unemployment strengthens workers' bargaining power This indicates that a decrease in unemployment leads to (2) in the nominal wage. One of the factors in z, the catch-all variable, is employment protection, which makes it costly for employers to lay off workers. An increase in this factor will be expected to (3)- the nominal wage. (1) fair (2)O an increase O a decrease (3) O decrease O increase O nominal O real

Explanation / Answer

An increase in the expected price level leads to an increasing nominal wage since both workers and firms care about nominal wage

If we view wages as being dertemined by worker-employer bargaining then lower unemployment strengthens workers bargainig power
THis indicates that adecrease in unemplyement leads to increase in the nomial wage

An increase in this factor will be expected to increase the nominal wage

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