If rational workers and firms know that the Federal Reserve is following a contractionary monetary policy,they will expect inflation to ________ and will adjust wages so that the real wage ________.

Question

Quizplus · Accepted Answer

When the Federal Reserve follows a contractionary monetary policy, it reduces the money supply and increases interest rates. This leads to a decrease in aggregate demand and inflation expectations. Rational workers and firms will adjust their wages and prices downwards to reflect this decrease in demand and inflation expectations. As a result, the real wage remains unchanged.

If Rational Workers and Firms Know That the Federal Reserve