The Stock Market Boom of 2010
Imagine that in 2010 the economy is in long-run equilibrium. Then stock prices rise more than expected and stay high for some time.
-Refer to Stock Market Boom 2010.What happens to the expected price level and what impact does this have on wage bargaining?
A)The expected price level falls.Bargains are struck for higher wages.
B)The expected price level falls.Bargains are struck for lower wages.
C)The expected price level rises.Bargains are struck for higher wages.
D)The expected price level rises.Bargains are struck for lower wages.

Question

Quizplus · Accepted Answer

When stock prices rise more than expected and stay high for some time, it leads to an increase in wealth and consumer confidence. This increases the demand for goods and services, which results in a higher price level. Therefore, the expected price level rises. With this rise in the expected price level, workers expect higher wages to compensate for the increase in the cost of living. Thus, bargains are struck for higher wages.