FIGURE 24-1 -Refer to Figure 24-1.If the economy is currently producing output of Y₀ and wages are sticky downwards,then the A)economy will eventually move to point B. B)economy will move only slowly toward point A as wages slowly adjust. C)economy will quickly move to point A. D)level of output will decrease below Y₀. E)AD curve will eventually shift to the right and return the economy to its full-employment level of output.

Question

Quizplus · Accepted Answer

If wages are sticky downwards and the economy is currently producing output of Y₀, then there is downward pressure on prices and firms are facing lower profits. As a result, they may reduce their output in the short run, causing the economy to move to point A. However, as wages slowly adjust downwards, firms will be able to reduce their costs and increase their profits, leading to an increase in output towards YF. The adjustment may be slow, but eventually, the economy will approach full-employment output. Therefore, option B is the best choice. Option A is incorrect because the economy is more likely to move towards point A rather than point B. Option C is incorrect because the adjustment process may take some time. Option D is incorrect because there is no reason for the level of output to decrease below Y₀. Option E is incorrect because there is no information to suggest that the AD curve will shift to the right.

FIGURE 24-1 -Refer to Figure 24-1.If the Economy Is Currently Producing Output