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

Question

Quizplus · Accepted Answer

When people correctly anticipate an increase in inflation and wages adjust immediately, the price level rises due to increased costs, but real GDP remains unchanged as the economy is already at potential GDP.

If the Economy Is Initially at Potential GDP and People