Tight monetary policy results in a long period of disinflation and high unemployment if:
A) the monetary policy is credible.
B) nominal wages are sticky.
C) prices are flexible.
D) market confidence is high.

Question

Quizplus · Accepted Answer

When nominal wages are sticky, it means they do not adjust immediately in response to changes in monetary policy. As a result, when tight monetary policy is implemented, it takes longer for wages to adjust downwards, causing a decrease in consumer spending and aggregate demand, ultimately leading to high unemployment. Additionally, disinflation, or a decrease in the rate of inflation, occurs as the decrease in demand leads to a decrease in prices. Therefore, tight monetary policy results in a long period of disinflation and high unemployment when nominal wages are sticky.

Tight Monetary Policy Results in a Long Period of Disinflation