When aggregate demand declines unexpectedly and wage contracts are fixed, then inflation will
A) increase and business firms will hire new workers.
B) decline and firms will reduce wages.
C) decline and business firms will lay off workers.
D) increase and business firms will lay off workers.
E) increase and business firms will increase wages.

Question

Quizplus · Accepted Answer

When aggregate demand declines unexpectedly and wage contracts are fixed, businesses are unable to reduce wages immediately. This leads to a decrease in profits, which ultimately results in companies laying off workers. As a result, there will be a decrease in inflation.

When Aggregate Demand Declines Unexpectedly and Wage Contracts Are Fixed