Workers and firms both expect that prices will be 4 per cent 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 4 per cent.
C) the short-run aggregate supply curve will shift to the left as wages increase.
D) aggregate demand will increase by 4 per cent.

Question

Quizplus · Accepted Answer

If both workers and firms expect prices to be 4 per cent higher next year than they are this year, then workers will demand higher wages to compensate for the expected inflation. However, if firms agree to pay higher wages, their production costs will increase, which could force them to raise prices further, leading to a wage-price spiral. This means that the short-run aggregate supply curve will shift to the left as higher wages lead to higher costs and lower profits. As a result, firms will produce less output, leading to an overall reduction in aggregate supply.

Workers and Firms Both Expect That Prices Will Be 4