Use the following to answer questions .
Exhibit: AD-AS and the Inflation-Unemployment Cycle
-(Exhibit: AD-AS and the Inflation-Unemployment Cycle) Suppose initially the economy was at point 1 and as a result of
Stabilization policies, it is now at point 3. Consequently, there will be pressure for
A) workers to settle for lower nominal wages.
B) firms to decrease prices.
C) workers and firms to incorporate price increases into their expectations.
D) the Fed to buy bonds in the open market.

Question

Use the following to answer questions .
Exhibit: AD-AS and the Inflation-Unemployment Cycle 
-(Exhibit: AD-AS and the Inflation-Unemployment Cycle) Suppose initially the economy was at point 1 and as a result of
Stabilization policies, it is now at point 3. Consequently, there will be pressure for
A) workers to settle for lower nominal wages. 
B) firms to decrease prices. 
C) workers and firms to incorporate price increases into their expectations. 
D) the Fed to buy bonds in the open market.

Quizplus · Accepted Answer

When the economy moves from point 1 to point 3, it typically indicates an increase in aggregate demand, leading to higher prices and lower unemployment. As a result, workers and firms will likely adjust their expectations to account for the anticipated inflation, incorporating price increases into their future wage and price setting.

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