If workers and firms forecast inflation accurately,
A)the aggregate supply curve will be vertical.
B)the real wage will not decline as the price level rises.
C)workers will not lose from inflation, and firms will not gain.
D)All of these responses are correct.

Question

Quizplus · Accepted Answer

When workers and firms accurately forecast inflation, they adjust their expectations and actions accordingly. This means that the real wage remains stable as nominal wages adjust to the inflation rate, ensuring that workers do not lose purchasing power and firms do not gain extra profit margins from the inflation. Consequently, the aggregate supply curve reflects an economy in long-term equilibrium, where it is vertical, indicating that output is at its natural rate and is not influenced by the price level.

If Workers and Firms Forecast Inflation Accurately