If the Fed follows a high-growth monetary policy, but workers believe that the policy is time inconsistent, then low-wage contracts will be in force and unemployment will decline.

Question

Quizplus · Accepted Answer

If workers believe that the Fed's high-growth monetary policy is time inconsistent, they will expect inflation to rise in the future. This will lead them to demand higher wages in their contracts, which will make it more difficult for firms to hire workers and will lead to higher unemployment.

If the Fed Follows a High-Growth Monetary Policy, but Workers