Figure 16-7
-Refer to Figure 16-7. Suppose initially the economy was at point 1 and as a result of
Stabilization policies, it is now at point 3. Consequently, there will be pressure for
A) workers to settle for lower nominal wages.
B) firms to decrease prices.
C) workers and firms to incorporate price increases into their expectations.
D) the Fed to buy bonds in the open market.

Question

Figure 16-7 
-Refer to Figure 16-7. Suppose initially the economy was at point 1 and as a result of
Stabilization policies, it is now at point 3. Consequently, there will be pressure for
A) workers to settle for lower nominal wages. 
B) firms to decrease prices. 
C) workers and firms to incorporate price increases into their expectations. 
D) the Fed to buy bonds in the open market.

Quizplus · Accepted Answer

Moving from point 1 to point 3 in a typical economic model (not shown here, but commonly understood in the context of stabilization policies) often implies an economy moving to a higher price level or inflationary environment. This would lead workers and firms to adjust their expectations upwards regarding future prices, leading to anticipations of further price increases.

Figure 16-7 -Refer to Figure 16-7. Suppose Initially the Economy Was at Economy