Question

What might prevent quick or immediate price adjustments with rational expectations, such that there is a trade-off between inflation and unemployment?

A. Collective bargaining agreements.
B. Annual contracts.
C. The lack of price controls.
E. Daily information about market prices.
F. Liquidity in financial markets.

Answer 1

Collective bargaining agreements and annual contracts can create rigidities that prevent quick price adjustments in an economy, even when individuals have rational expectations, leading to a potential trade-off between inflation and unemployment.

Step-by-step explanation:

The question evaluates what might prevent quick price adjustments in an economy where individuals have rational expectations, potentially leading to a trade-off between inflation and unemployment. Factors such as collective bargaining agreements, which lock in wages and conditions for a period, and annual contracts, which set pricing terms for extended durations, can create rigidities that slow down price and wage adjustments.

These rigidities impact how quickly an economy can respond to changes. This contrasts with a situation lacking these rigidities, such as when there is daily information about market prices, which can drive faster adjustments reflective of current supply and demand conditions.