Wage and price rigidities created by long-term contracts suggest that an anticipated monetary expansion will have
A)no effect on the aggregate price level.
B)no effect on aggregate output.
C)an effect on aggregate output only.
D)an effect on both aggregate output and the price level.

Question

Quizplus · Accepted Answer

Long-term contracts make wages and prices rigid in the short run, which means that an expansionary monetary policy may lead to an increase in aggregate output but with a corresponding increase in the aggregate price level due to the sticky prices/wages. Therefore, there will be an effect on both aggregate output and the price level.

Wage and Price Rigidities Created by Long-Term Contracts Suggest That