If people correctly anticipate an increase in inflation so that their money wage rate adjusts immediately, then, assuming the economy is initially at potential GDP,
A) only the price level rises with no change in real GDP.
B) only real GDP increases with no change in the price level.
C) neither the price level nor real GDP increase.
D) both the price level and real GDP increase.

Question

Quizplus · Accepted Answer

When people anticipate inflation correctly and wages adjust immediately, the nominal wage increases offset the inflation, keeping real wages constant. This means that the real GDP remains at potential GDP, and only the price level rises.

If People Correctly Anticipate an Increase in Inflation So That