Question

Other things the same, if workers and firms expected inflation to be 2%, but it is only 1% then a. employment and production rise. b. employment rises and production falls. nc. employment falls and production rises. d. employment and production fall.

Answer 1

The correct answer is option d.

Step-by-step explanation:

If the expected rate of inflation is higher than the actual rate it will lead to a decline in employment and production. If the workers expect inflation to be higher they will demand an increase in their nominal wages.

The increase in nominal wages will make it costlier to hire workers, this will cause employment to decrease.

As the higher nominal wages will increase the cost of production, the production of output will decrease as well.