Unemployment tends to go up when aggregate demand falls mainly because
A) when wages fall, workers seek alternative employment.
B) unions renegotiate for lower wages, making it difficult for job searchers to find suitable jobs.
C) wage rates tend to be downward rigid.
D) most human capital is general and not firm-specific.

Question

Quizplus · Accepted Answer

When aggregate demand falls, it creates a decrease in the demand for goods and services which then leads firms to decrease their production which will eventually lead to unemployment. However, if wages could easily fall, then firms might be able to reduce their wage bill, and continue to hire more workers at the lower wage rate, which would help to counterbalance the fall in demand. Nevertheless, most wage rates tend to be downward rigid, meaning that it's challenging to reduce wage rates without creating unhappiness and reduced productivity amongst workers. This leads to unemployment since firms are unable to decrease their wage bills by paying lower wages, making it difficult to counteract the fall in demand.

Unemployment Tends to Go Up When Aggregate Demand Falls Mainly