Suppose the economy is in long-run equilibrium. Then, suppose workers and firms suddenly expect higher prices...

Suppose the economy is in long-run equilibrium. Then, suppose workers and firms suddenly expect higher prices in the future and agree to an increase in wages. Explain the following questions using appropriate diagrams. Describe the initial impact of this event in the model of aggregate demand (AD) and aggregate supply (AS) by explaining which curve shifts which way. What happens to the price level and real output in the short run? If policymakers wanted to move output back to the natural rate of output through monetary policy, what should they do? If policymakers were able to move output back to the natural rate of output, what would the policy do to prices? If policymakers had done nothing at all, what would have happened to the wage rate as the economy self-corrected or adjusted back to the natural rate of output on its own.

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Rahul Sunny answered 1 year ago

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