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%.
E)the long-run aggregate supply curve will shift to the right by 3%.

Question

Quizplus · Accepted Answer

If workers and firms expect prices to be 3% higher next year, workers will demand a 3% increase in their nominal wages to maintain their real wages. Firms, in turn, will have to increase their costs, which will result in a decrease in short-run aggregate supply - causing the supply curve to shift to the left.

Workers and Firms Both Expect That Prices Will Be 3