After a period of sustained unexpected inflation,it is likely that the renegotiation of nominal wages will
A)shift the SAS curve downward thereby increasing output.
B)shift the SAS curve upward thereby increasing output.
C)shift the SAS curve upward thereby decreasing output.
D)shift the AD curve downward thereby increasing output.

Question

Quizplus · Accepted Answer

A period of sustained unexpected inflation indicates that the price level has risen, leading to an upward shift of the SAS curve. Renegotiation of nominal wages may lead firms to increase prices further as they attempt to maintain profit margins, further increasing inflation and shifting the SAS curve upward. As a result, output is likely to decrease, which is why option C - a shift in the SAS curve upward, resulting in a decrease in output, is the best choice. The AD curve is not directly impacted by renegotiation of wages and therefore option D is incorrect. Option A is also incorrect as a downward shift in the SAS curve would indicate a decrease in output, which is not likely in the case of sustained unexpected inflation.

After a Period of Sustained Unexpected Inflation,it Is Likely That