Workers and firms both expect that prices will be 4% 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 4%.
C)the short-run aggregate supply curve will shift to the left as wages increase.
D)aggregate demand will increase by 4%.

Question

Quizplus · Accepted Answer

If both workers and firms expect prices to increase, then workers will demand higher wages to maintain their purchasing power. However, firms may not be willing to pay higher wages, as their costs will also increase. As a result, the short-run aggregate supply curve, which shows the relationship between the overall price level and the quantity of goods and services that firms are willing to produce, will shift to the left. This means that firms will produce less output at any given price level, leading to a decrease in aggregate supply.

Workers and Firms Both Expect That Prices Will Be 4