When the central bank controls the interest rate, a rise in the price target will, in the short run, cause:
A) the wage setting curve to shift upward.
B) the wage setting curve to shift downward.
C) an increase in the nominal wage.
D) the AD curve to shift leftward.
E) the price setting curve to shift down.

Question

Quizplus · Accepted Answer

A rise in the price target typically leads to higher inflation expectations, which can result in an increase in the nominal wage as workers demand higher wages to keep up with expected inflation.

When the Central Bank Controls the Interest Rate, a Rise