Which of the following mechanisms helps output to return to potential after a demand shock?
A) Change in business mentality
B) Change in nominal wage rate
C) Large changes in the capital stock
D) Inability of the price level to change
E) Change in inventories.

Question

Quizplus · Accepted Answer

A change in the nominal wage rate can help output return to potential after a demand shock because it directly affects the cost of production. If nominal wages decrease, the cost of production decreases, making it more profitable for firms to produce their goods and services, which can lead to an increase in output.

Which of the Following Mechanisms Helps Output to Return to Potential