What increase in nominal wages will be necessary if they expect to maintain their purchasing power?

Expectations play an important role in macroeconomics. Imagine that you are representing a large lab Show more Expectations play an important role in macroeconomics. Imagine that you are representing a large labor union in negotiations concerning wages for the next year. The inflation rate for the past several years has been 10%. A. If workers have adaptive expectations What increase in nominal wages will be necessary if they expect to maintain their purchasing power? Why? (4 points) B. If this wage increase is granted to a large number of workers in the economy what will be the effect on aggregate supply? Show this in a graph. (4 points) C. How will your answer in part B change if workers have rational expectations and realize that the new chairman of the Fed is a very determined person who hates inflation and has resolved to reduce it by any means necessary? (4 points) D. Finally use an AD/AS diagram to show what will happen if workers with adaptive expectations demand and receive a 10% wage increase while the chair of the Fed carries through with monetary policies designed to reduce inflation. How will AS and AD shift and what will happen to output and the price level? (5 points) Show less

QUICK QUOTE

Approximately 250 words