Scenario 14-2
The economy is in long-run equilibrium. Suddenly, due to corporate scandals, international tensions, and the loss of confidence among policymakers, citizens become pessimistic concerning the future. They maintain this level of pessimism for a long time.
-Refer to the Scenario 14-2.Which of the following are consistent with the aggregate demand and aggregate supply theory?
A)The expected price level rises. Bargains are struck for higher increases in wages.
B)The expected price level rises. Bargains are struck for lower increases in wages.
C)The expected price level falls. Bargains are struck for higher increases in wages.
D)The expected price level falls. Bargains are struck for lower increases in wages.

Question

Quizplus · Accepted Answer

In a situation where there is a decrease in aggregate demand due to pessimism among citizens, there will be a fall in the expected price level as firms produce less and demand for labor falls. As a result, bargains will be struck for lower increases in wages, as there is less demand for labor. This is consistent with the aggregate demand and aggregate supply theory. Hence, option D is the best choice.

Scenario 14-2 The Economy Is in Long-Run Equilibrium. Suddenly, Due to Corporate