If output is below full employment, we expect wages and prices to fall, money demand to decrease, and interest rates to fall.

Question

Quizplus · Accepted Answer

When output is below full employment, it indicates excess supply in the labor market, leading to falling wages. Lower wages reduce production costs, causing prices to fall. With lower prices, the demand for money decreases as people need less money for transactions, leading to a decrease in interest rates as the supply of money exceeds the demand.

If Output Is Below Full Employment, We Expect Wages and Prices