A) supply creates its own demand.
B) nominal wages are (at least for a time) inﬂexible downward.
C) ﬁrms misperceive the price-level decline as being permanent.
D) deﬂation reduces the purchasing power of the dollar.

Question

A) supply creates its own demand. 
B) nominal wages are (at least for a time) inﬂexible downward. 
C) ﬁrms misperceive the price-level decline as being permanent. 
D) deﬂation reduces the purchasing power of the dollar.

Quizplus · Accepted Answer

This statement refers to the sticky wage theory, which suggests that nominal wages are slow to adjust downwards in response to a decrease in price levels. As a result, firms have higher labor costs relative to the price level and may reduce output instead of lowering prices, leading to a decline in aggregate demand and potentially causing a recession.

A) Supply Creates Its Own Demand