Let all workers sign three-year contracts with 10 percent wage increases guaranteed for each year. Let actual GDP match its potential to begin with and assume that potential GDP grows 3 percent per year. If the money supply were to grow at 5 percent per year, given markup pricing, you should expect to see
A) continued 10 percent inflation per year with no recession.
B) continued 10 percent inflation per year with some recession.
C) a reduction in inflation to 2 percent per year with no recession.
D) a reduction in inflation to 2 percent per year with some recession.
E) cannot tell from the information provided.

Question

Quizplus · Accepted Answer

The 5 percent money supply growth will not fully accommodate the 10 percent wage increase, leading to cost-push inflation and potential recession due to reduced real output.

Let All Workers Sign Three-Year Contracts with 10 Percent Wage