If the economy is at potential output and the Bank of Canada decreases the money supply so that actual output is less than potential output,eventually nominal wages will decrease.

Question

Quizplus · Accepted Answer

If the economy is at potential output and the Bank of Canada decreases the money supply, it will lead to a decrease in aggregate demand, resulting in a decrease in actual output. However, as firms will still have the same fixed costs, they will need to reduce their costs of production, which may lead to a decrease in nominal wages. This is because firms will want to maintain profit margins and reduce their costs of production to be able to sell their goods and services at a lower price due to the decrease in demand.

If the Economy Is at Potential Output and the Bank