Scenario 14-2
The economy is in long-run equilibrium. Suddenly, due to corporate scandals, a recession experienced by a major trading partner, and the loss of confidence among policymakers, citizens become pessimistic concerning the future. They maintain this level of pessimism for a long time.
-Refer to the Scenario 14-2. Which statement is consistent with the aggregate demand and aggregate supply theory?
A) The expected price level rises. Bargains are struck for higher increases in wages.
B) The expected price level rises. Bargains are struck for lower increases in wages.
C) The expected price level falls. Bargains are struck for higher increases in wages.
D) The expected price level falls. Bargains are struck for lower increases in wages.

Question

Quizplus · Accepted Answer

In this scenario, the long-run equilibrium is disturbed due to external factors causing pessimism among citizens. This will result in a decrease in aggregate demand. As a consequence, firms will produce less output, and there will be a reduction in demand for labor. Hence, bargains will be struck for lower increases in wages with an expected decrease in the price level. Thus, the best choice is D.

Scenario 14-2 The Economy Is in Long-Run Equilibrium. Suddenly, Due to Corporate