When workers and firms become aware of a rise in the general price level:
A) they will not do anything, because they know they are powerless to counter any economic changes.
B) they will incorporate higher prices into their expectations.
C) firms with sticky prices will ultimately adjust their prices downward.
D) they will agree to renegotiate wage contracts downward.

Question

Quizplus · Accepted Answer

When workers and firms become aware of a rise in the general price level, they are likely to incorporate higher prices into their expectations. This means that they will anticipate that prices will continue to rise and may adjust their behavior accordingly, such as demanding higher wages or raising prices for their goods and services. This response is known as inflation expectations and can reinforce the initial inflationary shock. Choices A and D are not likely, as workers and firms may still try to adjust their behaviors in response to economic changes. Choice C may be true for firms with sticky prices, but not necessarily for all firms.

When Workers and Firms Become Aware of a Rise in the General