Figure 16-6 -Refer to Figure 16-6. Suppose the Economy Was Operating at Was

Multiple Choice

Figure 16-6
-Refer to Figure 16-6. Suppose the economy was operating at point e in period 1. Expansionary fiscal and monetary policies adopted in period 1 resulted in a movement to point g in period 3. What happens when workers and firms become aware of a rise in the general price to P_g?

A) Workers will agree to take wage cuts and firms will agree to lower prices to ward off inflation.
B) They will revise their expectations of future prices to incorporate the higher price level.
C) Firms with sticky prices will ultimately adjust their prices downward.
D) Firms and workers will agree to renegotiate wage contracts downward.