Even if expectations of inflation are rational,sluggish adjustment of wages and prices will still create a short-run trade-off between inflation and unemployment.

Question

Quizplus · Accepted Answer

Even if expectations of inflation are rational, the sluggish adjustment of wages and prices will still create a short-run trade-off between inflation and unemployment. This is because it takes time for wages and prices to adjust to changes in the economy, which can temporarily create a mismatch between the demand for labor and the supply of labor. This leads to cyclical unemployment in the short run until wages and prices adjust to the new equilibrium.

Even If Expectations of Inflation Are Rational,sluggish Adjustment of Wages