Suppose the economy is in long-run equilibrium and the government decreases its expenditures.Which of the following helps explain the logic of why the economy moves back to long-run equilibrium?
A)as people revise their price-level expectations upward,firms and workers strike bargains for higher nominal wages.
B)as people revise their price-level expectations upward,firms and workers strike bargains for lower nominal wages.
C)as people revise their price-level expectations downward,firms and workers strike bargains for higher nominal wages.
D)as people revise their price-level expectations downward,firms and workers strike bargains for lower nominal wages.

Question

Quizplus · Accepted Answer

If the government decreases its expenditures, the economy moves to a lower level of aggregate demand. This will cause prices to fall, and people will revise their price-level expectations downward. As a result, firms and workers will strike bargains for lower nominal wages to maintain their real wages, which will also help the economy move back to the long-run equilibrium.

Suppose the Economy Is in Long-Run Equilibrium and the Government