The existence of staggered overlapping wage contracts makes the assumption of backward-looking expectations ________ reasonable since wages and prices tend to adjust ________ to changes in nominal GDP.
A)less,quickly
B)less,gradually
C)more,quickly
D)more,gradually

Question

Quizplus · Accepted Answer

The existence of staggered overlapping wage contracts implies that wages and prices adjust slowly over time because not all contracts are renegotiated at once. This makes the assumption of backward-looking expectations more reasonable, as it suggests that past data on wages and prices are used to form expectations due to the gradual adjustment to changes in nominal GDP.

The Existence of Staggered Overlapping Wage Contracts Makes the Assumption