Assume that people have rational expectations and wages are fixed by long-term contracts.If prices of goods can change fairly quickly, we should still expect that
A)random shocks will not significantly affect the level of output
B) labor markets will be in equilibrium longer than goods markets
C)firms will not supply more output after a price increase
D)unanticipated monetary policy changes will affect the level of real output in the short run
E)none of the above

Question

Quizplus · Accepted Answer

If people have rational expectations and wages are fixed by long-term contracts, then unanticipated monetary policy changes can affect the level of real output in the short run. This is because changes in the money supply can lead to changes in prices, which can cause firms to adjust their level of output. However, in the long run, wages will adjust to reflect changes in prices, so the impact on output will be temporary. None of the other choices are necessarily true given the assumptions stated.

Assume That People Have Rational Expectations and Wages Are Fixed