When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand
A) there will be no unemployment.
B) workers will overestimate the real wage rate.
C) unemployment will be at the natural rate.
D) workers will underestimate the real wage rate.

Question

Quizplus · Accepted Answer

When both workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand, they adjust their expectations and actions accordingly. This means that any potential misalignment between wage demands and wage offers due to unexpected inflation is avoided, allowing the unemployment rate to stabilize at the natural rate, which is the rate of unemployment consistent with a stable rate of inflation.

When Workers and Employers Correctly Anticipate an Increase in Inflation