If rational workers and firms know that the Bank of Canada is following a contractionary monetary policy, they will expect inflation to ________ and will adjust wages so that the real wage ________.

Question

Quizplus · Accepted Answer

If the Bank of Canada is following a contractionary monetary policy, it means that they are reducing the money supply or increasing interest rates to curb inflation. Rational workers and firms understand that this policy will result in decreased demand for goods and services and subsequently lead to lower prices or deflation. Therefore, they will adjust wages downwards so that the real wage remains the same. This is because if they don't adjust wages, their labor cost will be higher than the market price, and they may lose their competitive advantage. Hence, we can conclude that option B is the correct choice as it indicates that workers will reduce their wages so that the real wage remains unchanged.

If Rational Workers and Firms Know That the Bank of Canada