Scenario 14-1. The economy is in long-run equilibrium. Suddenly, due to improved international relations and the increased confidence of policymakers, citizens become more optimistic about the future and stay this way for a long time.
-Refer to Scenario 14-1. Which of the following are predicted by the aggregate demand and aggregate supply theory?
A)The expected inflation falls. Workers bargain for higher increases in wages.
B)The expected inflation falls. Workers bargain for lower increases in wages.
C)The expected inflation rises. Workers bargain for higher increases in wages.
D)The expected inflation rises. Workers bargain for lower increases in wages.

Question

Quizplus · Accepted Answer

When citizens become more optimistic, aggregate demand increases, leading to higher expected inflation. Consequently, workers anticipate higher prices and bargain for higher wage increases to maintain their purchasing power.