Suppose that the equilibrium real wage (the intersection between the supply and the demand for labor) in the job market is 30

Suppose that the equilibrium real wage (the intersection between the supply and the demand for labor) in the job market is 30

(a)  If the price level is 2, what is the nominal wage?

(b)  Consider a rightward shift in the supply of labor that would lower the real wage to 20. If firms are unwilling to cut nominal wages to reestablish equilibrium, i.e., they leave the nominal wage unchanged (and equal to the value you found in (a)), then how will the labor market be affected? Draw a graph to illustrate your answer.

(c)  By how much should inflation rise so as to reestablish equilibrium in the labor market given the unwillingess of firms to cut nominal wages?

 

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