A negative shock to aggregate demand will lead to a higher unemployment rate if:
A) time bunching in economic activity is lower.
B) intertemporal substitution in labor supply is lower.
C) investments are more easily reversible.
D) labor adjustment costs are higher.

Question

Quizplus · Accepted Answer

Higher labor adjustment costs would make firms less likely to adjust their labor force in response to reduced demand, which would likely result in higher unemployment rates. Time bunching in economic activity, intertemporal substitution in labor supply, and investments reversibility are not directly related to the ability of firms to adjust their labor force during a downturn in aggregate demand.

A Negative Shock to Aggregate Demand Will Lead to a Higher