If workers expect inflation, and negotiate wage increases that exactly match price increases, the result is a
A)horizontal aggregate supply curve at the level of potential GDP.
B)vertical aggregate supply curve at the level of potential GDP.
C)horizontal aggregate demand curve at the level of potential GDP.
D)vertical aggregate demand curve at the level of potential GDP.

Question

Quizplus · Accepted Answer

If workers negotiate wage increases that exactly match price increases, it means that the costs of production will not change and the aggregate supply curve will be vertical at the level of potential GDP. This is because firms will not be incentivized to produce more output at a higher price level, as their costs are increasing at the same rate as their revenue. Therefore, the aggregate supply curve will be independent of the price level and vertical at the level of potential GDP.

If Workers Expect Inflation, and Negotiate Wage Increases That Exactly