Assuming prices and wages are flexible, a recession will decrease the price level, which:
A)raises nominal wages, and which eventually decreases the short-run aggregate supply curve, thus decreasing real output to its original level.
B)raises nominal wages, and which eventually increases the short-run aggregate supply curve, thus increasing real output to its original level.
C)reduces nominal wages, and which eventually decreases the short-run aggregate supply curve, thus decreasing real output to its original level.
D)reduces nominal wages, and which eventually increases the short-run aggregate supply curve, thus increasing real output to its original level.

Question

Quizplus · Accepted Answer

In a recession, the decrease in the price level reduces nominal wages. This reduction in wages makes production cheaper, which increases the short-run aggregate supply curve, eventually increasing real output back to its original level.

Assuming Prices and Wages Are Flexible, a Recession Will Decrease