Which of the following pairs helps explain why self-correction from a decline in aggregate demand in the economy may be slow rather than rapid?
A) theory of compensation wage differentials; theory of derived demand for labor
B) eﬃciency wage theory; minimum wage laws
C) insider-outsider theory; principle-agent problem
D) externalities; eﬃciency wage theory

Question

Quizplus · Accepted Answer

The combination of efficiency wage theory and minimum wage laws helps explain why self-correction from a decline in aggregate demand may be slow. Efficiency wage theory argues that firms pay their workers above the market wage to increase productivity and reduce turnover. As a result, firms may be reluctant to reduce wages even in the face of declining demand. Minimum wage laws also prevent wages from falling, leading to higher unemployment and slower self-correction.

Which of the Following Pairs Helps Explain Why Self-Correction from a Decline