When aggregate demand declines, wage rates may be inﬂexible downward, at least for a time, because of
A) the foreign purchases effect.
B) inﬂexible product prices.
C) labor contracts.
D) the wealth effect.

Question

Quizplus · Accepted Answer

Labor contracts can prevent wage rates from immediately adjusting downward in response to a decline in aggregate demand. These contracts often specify fixed wages for a certain period, making it difficult for employers to lower wages in response to changing economic conditions.

When Aggregate Demand Declines, Wage Rates May Be Inﬂexible Downward