Which of the following pairs help 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;insider-outsider theory.
C) Insider-outsider theory;principle-agent problem.
D) Externalities;efficiency wage theory.

Question

Quizplus · Accepted Answer

The efficiency wage theory suggests that firms may choose to pay above-market wages to their employees to increase worker productivity and reduce turnover. This can create a higher level of unemployment because firms cannot afford to hire as many workers at these higher wages, resulting in a slower self-correction process. The insider-outsider theory suggests that there are entrenched groups in the labor market who are more likely to receive job offers, leaving a larger group of outsiders marginalized and unemployed. This can also slow down the self-correction process as these unemployed workers compete for the same scarce job opportunities, keeping wages and employment levels low.

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