If the economy is operating below full employment, falling wages and prices will increase money demand and raise interest rates.

Question

Quizplus · Accepted Answer

When the economy is operating below full employment, there is usually a decrease in demand for goods and services, which can lead to falling wages and prices. This means that the cost of borrowing decreases, resulting in a decrease in interest rates. As a result, money demand decreases, not increases, because people will not need to borrow as much money to finance their consumption and investment.

If the Economy Is Operating Below Full Employment, Falling Wages