Suppose the economy is at the natural rate of unemployment, but it's an election year and expansionary policies are used to reduce the unemployment rate. If inflation now exceeds expected inflation, real wages have _____ and workers will demand _____ in their nominal wages.

Question

Quizplus · Accepted Answer

If expansionary policies are used to reduce the unemployment rate below the natural rate, inflation will increase as there is more demand for goods and services than the economy can supply. If inflation exceeds expected inflation, real wages will fall as they are adjusted for inflation. In this case, workers will demand increases in their nominal wages to compensate for the decrease in real wages. Therefore, the best choice is D.

Suppose the Economy Is at the Natural Rate of Unemployment