When aggregate demand declines unexpectedly and wage contracts are fixed, then the average price level 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, firms are unable to reduce wages. As a result, they will reduce production and output, which will lead to laying off workers. This decrease in output will lead to a decrease in the average price level as well.

When Aggregate Demand Declines Unexpectedly and Wage Contracts Are Fixed