Assume that an unemployed person expects inflation to be 4.5 percent.In reality, inflation turns out to be 2.9 percent.If wage expectations lag behind actual price changes:
A)job offers below the reservation wage will decline, and the unemployment rate will rise.
B)job offers above the reservation wage will rise, and the unemployment rate will fall.
C)job offers above the reservation wage will decline, and the unemployment rate will rise.
D)job offers above the reservation wage will decline, and the unemployment rate will fall.
E)job offers below the reservation wage will increase, and the unemployment rate will fall.

Question

Quizplus · Accepted Answer

If wage expectations lag behind actual price changes, individuals may continue to demand wages that reflect their expectation of higher inflation. This would lead to an increase in reservation wages that are above the market-clearing wage. As a result, job offers above the reservation wage will decline, and the unemployment rate will rise. So, option C is correct.

Assume That an Unemployed Person Expects Inflation to Be 4