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Suppose that banks are less able to raise funds and so lend less. Consequently, because people...

Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. If nominal wages are sticky, which of the following helps explains the change in output?

a. real wages fall, so firms choose to produce less

b. real wages fall, so firms produce more

c. real wages rise, so firms produce less

d. real wages rise, so firms produce more

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Answer #1

Due to this crisis the aggregate demand in an economy will fall (because of fall in investment level). As the aggregate demand falls and shifts to the left cause a fall in price as well as fall in GDP level.

As the price level falls and nominal wage is sticky, real wage rise, so firms produce less.

So, the correct answer is an option (c).

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