Explain why expansionary monetary policy would not result in reduced unemployment rates if workers and firms have rational expectations
What will be an ideal response?
If workers and firms have rational expectations, they anticipate that expansionary monetary policy will increase inflation. The increase in inflation expectations will be incorporated into wage contracts, resulting in no change in the real wage. If there is no change in the real wage, then there will be no change in unemployment and no change in real GDP. As a result, there will be no trade-off between unemployment and inflation. Inflation will rise, but the unemployment rate will not be affected.
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If the income effect of a change in the wage dominates the substitution effect, then workers will want to work more when the wage increases
a. True b. False Indicate whether the statement is true or false
Refer to the diagram. Equilibrium price is:
A. e.
B. d.
C. c.
D. b.