Scenario 14-1
The economy is in long-run equilibrium. Suddenly, due to improved international relations, a boom experienced by a major trading partner, and the increased confidence of policymakers, citizens become more optimistic about the future and stay this way for a long time.
-Refer to the Scenario 14-1. What is 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

Increased optimism about the future typically leads to higher spending and investment, which shifts the aggregate demand curve to the right. This increase in demand can lead to higher prices, or expected inflation, and workers may bargain for higher wages to keep up with the rising cost of living.

Scenario 14-1 The Economy Is in Long-Run Equilibrium. Suddenly, Due to Improved