If workers and firms forecast inflation accurately,

Question

Quizplus · Accepted Answer

If workers and firms forecast inflation accurately, they will adjust their behavior accordingly. Workers will demand higher wages to compensate for the expected inflation, and firms will raise prices to cover the increased costs. This will result in a vertical aggregate supply curve, as firms will not be willing to supply more output at a lower price. The real wage will not decline as the price level rises, as workers will be able to negotiate higher wages to keep up with inflation. Workers will not lose from inflation, and firms will not gain, as both groups will be able to adjust their behavior to account for the expected inflation.

If Workers and Firms Forecast Inflation Accurately