Question

If rational workers and firms know that the Federal Reserve is following a contractionary monetary​ policy, they will expect inflation to​ ________ and will adjust wages so that the real wage​ ________.

Answer 1

Drop

Is constant

Step-by-step explanation:

Contractual monetary supply is an important mechanism for reducing inflation.

Answer 2

... they will expect inflation to​ decrease and will adjust wages so that the real wage ​remains unchanged.

Step-by-step explanation:

When the FED carries on a contractionary monetary policy it should reduce the money supply by increasing interest rates. This should lower consumption and therefore lower the inflation rate.

Generally wages are set so that they can match or exceed the inflation rate by a little margin, so if both workers and employers believe that the inflation rate will lower, then the wage increases should be lower. That way the purchasing power of the workers will not change.