A decrease in the price level is likely to decrease the aggregate amount of output supplied in the short run because
A) interest rate is high in the short run.
B) wages are sticky in the short run.
C) wages change in the short run.
D) the aggregate supply curve is vertical in the short run.

Question

Quizplus · Accepted Answer

In the short run, wages are sticky or inflexible, which means that they do not adjust immediately in response to changes in the price level. Therefore, a decrease in the price level will reduce the revenue for firms, and they may reduce their output supplied in response. This is captured by a movement up the aggregate supply curve. As wages become more flexible over time, the aggregate supply curve becomes flatter, and changes in the price level have a smaller effect on output in the long run.

A Decrease in the Price Level Is Likely to Decrease