Assume that a low-wage contract is in force in the society, and the central bank follows a low-money-growth policy.Which of the following will be observed?
A)The actual inflation rate will match the low rate that people had expected.
B)The actual inflation rate will be higher than the natural rate.
C)The actual inflation rate will be higher than the low rate that people had expected.
D)The actual inflation rate will be lower than the high rate that people had expected.
E)The unemployment rate will be lower than the natural rate.

Question

Quizplus · Accepted Answer

A low-wage contract means wages are set at a low level, which should keep prices low. If the central bank follows a low-money-growth policy, this means they are limiting the amount of money in circulation, which should also keep inflation low. Therefore, the actual inflation rate should match the low rate that people had expected.

Assume That a Low-Wage Contract Is in Force in the Society