Suppose workers and firms come to expect an expansionary monetary policy and the resulting inflation.What do some economists believe will occur when workers and firms believe this?
A) Workers and firms will act so as to prevent price increases from occurring.
B) The actions of workers and firms will lead to a further increase in output.
C) Neither output nor employment will be affected by the expansionary policy.
D) The monetary authority will be forced to cancel the expansionary policy.

Question

Suppose workers and firms come to expect an expansionary monetary policy and the resulting inflation.What do some economists believe will occur when workers and firms believe this?  
A) Workers and firms will act so as to prevent price increases from occurring. 
B) The actions of workers and firms will lead to a further increase in output. 
C) Neither output nor employment will be affected by the expansionary policy. 
D) The monetary authority will be forced to cancel the expansionary policy.

Quizplus · Accepted Answer

Some economists believe that if workers and firms fully anticipate the inflation resulting from an expansionary monetary policy, they will adjust their behavior accordingly, such as by demanding higher wages or increasing prices. This can neutralize the policy's effects on output and employment, leading to no real change in these areas.

Suppose Workers and Firms Come to Expect an Expansionary Monetary