If the economy is operating above full employment, falling wages and prices will stimulate investment and increase output.

Question

Quizplus · Accepted Answer

If the economy is already operating above full employment, falling wages and prices will not stimulate investment and increase output, as there are no additional resources (i.e. labor, capital) to expand production. At this point, falling wages and prices may even lead to a decrease in production and employment, as businesses may cut back on hiring and investment.

If the Economy Is Operating Above Full Employment, Falling Wages