If wages and prices adjust rapidly,we would expect expansionary monetary policy to be

Question

Quizplus · Accepted Answer

If wages and prices adjust rapidly, it means that they are flexible, and any changes in the money supply will quickly be reflected in prices and wages. In this case, expansionary monetary policy is less likely to affect the unemployment rate, as any increase in the money supply will quickly be absorbed by higher prices and wages, without having a significant impact on output and employment. Moreover, in this context, the short-run Phillips curve would be flatter, implying that expansionary monetary policy would result in a smaller decrease in unemployment for any given increase in inflation.

If Wages and Prices Adjust Rapidly,we Would Expect Expansionary Monetary