Aggregate demand decreases and real output falls but the price level remains the same.Which factor most likely contributes to downward price inflexibility?
A)the multiplier effect
B)the wealth effect
C)fear of price wars
D)business taxes

Question

Quizplus · Accepted Answer

Fear of price wars can cause firms to keep their prices stable even if there is a decrease in aggregate demand and real output falls. This is because if one firm lowers their prices, others may feel pressured to do the same in order to remain competitive, leading to a price war and lower profits for all firms involved. As a result, firms may be hesitant to lower their prices even if demand is lower, leading to downward price inflexibility. The other options (A, B, and D) do not directly relate to firms' pricing behavior and therefore are not likely to contribute to downward price inflexibility.

Aggregate Demand Decreases and Real Output Falls but the Price