9. Suppose workers and firms suddenly believe that inflation will be quite high over the coming year.

Question:

Suppose also that the economy begins in long-run equilibrium, and the aggregate-demand curve does not shift.

a. What happens to nominal wages? What happens to real wages?

b. Using an aggregate-demand/aggregate-supply diagram, show the effect of the change in expectations on both the short-run and long-run levels of prices and output.

c. Were the expectations of high inflation accurate?

Explain.

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