Which of the following are reasons why rational workers and firms may form their expectations by looking backward rather than forward?
A) the existence of long-term wage and price agreements would prevent actual inflation from responding immediately to an acceleration in nominal GDP
B) if in the past acceleration in nominal GDP has caused inflation, then a current acceleration might be expected to increase inflation
C) people may have no reason to believe that the acceleration in GDP growth will be permanent
D) Both A and B.

Question

Quizplus · Accepted Answer

Both A and B are reasons why rational workers and firms may form their expectations by looking backward rather than forward. The existence of long-term wage and price agreements would prevent actual inflation from responding immediately to an acceleration in nominal GDP, and if in the past acceleration in nominal GDP has caused inflation, then a current acceleration might be expected to increase inflation. Additionally, people may have no reason to believe that the acceleration in GDP growth will be permanent, which is another reason why they may form their expectations by looking backward rather than forward.

Which of the Following Are Reasons Why Rational Workers and Firms