Workers and firms both expect that prices will be 3% higher next year than they are this year.As a result
A)workers will be willing to take lower wages next year.
B)the purchasing power of wages will rise if wages increase by 3%.
C)the short-run aggregate supply curve will shift to the left as wages increase.
D)aggregate demand will increase by 3%.

Question

Quizplus · Accepted Answer

If workers and firms expect prices to be 3% higher next year, workers will demand higher wages to maintain their purchasing power. However, firms will have to increase their prices in order to pay higher wages, leading to a decrease in the short-run aggregate supply curve. This means that the expected increase in prices can lead to a decrease in production and economic growth in the short run.

Workers and Firms Both Expect That Prices Will Be 3