Aggregate Demand & Aggregate Supply Practice Question

Use an aggregate demand and aggregate supply diagram to illustrate and explain how each of the following will affect the equilibrium price level and real GDP:

Workers expect high future inflation and negotiate higher wages now

If the cost of hiring workers has gone up, then companies will not want to hire as many workers. Thus we should expect to see the aggregate supply shrink, which is shown as a shift to the left. When the aggregate supply gets smaller, we see a reduction in Real GDP as well as an increase in the price level. Note that the expectation of future inflation has caused the price level to increase today. Thus if consumers expect inflation tomorrow, they will end up seeing it today.