When aggregate demand declines, the price level may remain constant, at least for a time, because
A)firms individually may fear that their price cut may set off a price war.
B)menu costs rise.
C)price cuts tend to increase efficiency wages.
D)product markets are highly competitive.

Question

Quizplus · Accepted Answer

Firms may fear that reducing prices could lead to a price war, where competitors also lower their prices, potentially harming profits. This fear can cause prices to remain stable even when aggregate demand declines.

When Aggregate Demand Declines, the Price Level May Remain Constant