Suppose that following an expected decline in the price level, workers immediately renegotiate their money wage rates to match the fall in prices. This behavior is most consistent with
A) new Keynesian cycle theory.
B) the new classical cycle theory.
C) monetarist business cycle theory.
D) All of the above answers are correct.

Question

Quizplus · Accepted Answer

The behavior described is consistent with the new classical cycle theory, which assumes that workers have rational expectations and immediately adjust their money wage rates in response to changes in the price level. The new Keynesian cycle theory emphasizes sticky prices, making it less likely that workers would immediately renegotiate their wages. Monetarist business cycle theory emphasizes the role of changes in the money supply in causing business cycles, but does not speak directly to the behavior of workers following changes in the price level. Therefore, choices A and C are incorrect.

Suppose That Following an Expected Decline in the Price Level