If nominal wages are downwardly rigid,a countercyclical policy during a recession leads to ________.
A) an increase in employment
B) an increase in tax rates
C) a fall in investment
D) a fall in consumption

Question

Quizplus · Accepted Answer

If nominal wages are downwardly rigid, then countercyclical policies such as an increase in government spending or a reduction in taxes can lead to an increase in employment without a corresponding decrease in wages. This occurs because firms are unable to reduce wages in response to the recession, so the countercyclical policies help to stimulate demand and production, leading to an increase in jobs. Options B, C, and D are not necessarily true as they do not directly relate to the impact of downward nominal wage rigidity on countercyclical policies during a recession.

If Nominal Wages Are Downwardly Rigid,a Countercyclical Policy During a Recession