If all firms are paying efficiency wages and nominal aggregate demand falls,then between maintaining nominal wages and reducing them firms generally find it more profitable to ________ them,thus ________ the unemployment rate.
A)maintain,increasing
B)maintain,maintaining
C)reduce,increasing
D)reduce,maintaining

Question

Quizplus · Accepted Answer

When firms pay efficiency wages (wages above the market-clearing level to increase productivity), reducing wages in response to a fall in nominal aggregate demand could demotivate workers, reducing productivity. Therefore, firms might find it more profitable to maintain wages, which could lead to higher unemployment if demand for goods and services decreases, as firms try to cut costs elsewhere.

If All Firms Are Paying Efficiency Wages and Nominal Aggregate