When GDP is below potential output, prices fall because
A) firms can easily find new workers and are forced to offer higher wages, which decreases the costs of production.
B) firms can easily find new workers and can offer lower wages, which decreases the costs of production.
C) firms find it difficult to hire and retain workers and are forced to offer higher wages, which increases the costs of production.
D) firms find it difficult to hire and retain workers and can offer higher wages, which decreases the costs of production.

Question

Quizplus · Accepted Answer

When GDP is below potential output, there is less demand for goods and services, which leads to falling prices. In this scenario, firms can easily find new workers and can offer lower wages, which decreases the costs of production. Lower production costs result in lower prices for goods and services. Therefore, B is the correct answer. A, C, and D are incorrect because they suggest that firms are forced to offer higher wages, which would increase production costs and lead to higher prices, contradicting the premise of the question.

When GDP Is Below Potential Output, Prices Fall Because