Aggregate demand decreases and real output falls but the price level remains the same. Which of the following factors most likely contributes to downward price inflexibility in the immediate short run?
A) The multiplier effect
B) The wealth effect
C) Fear of price wars
D) Business taxes

Question

Quizplus · Accepted Answer

In the immediate short run, businesses may fear engaging in price wars to maintain market share, even with a decrease in demand. This fear of price wars and potential losses may cause businesses to maintain their current prices, leading to downward price inflexibility. The multiplier effect refers to the amplification of initial changes in spending, and the wealth effect relates changes in consumer spending to changes in their wealth. Business taxes may impact output and pricing decisions, but they are less likely to contribute to downward price inflexibility in the immediate short run.

Aggregate Demand Decreases and Real Output Falls but the Price