When output falls below the economy's full-employment output level, the following adjustments will typically occur:
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The demand for labor will decrease. (This is because firms are producing less and do not need as many workers.)
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Nominal wages will decrease. (As demand for labor decreases, employers may lower wages to reduce costs, especially if there is unemployment.)
The other options are less likely under these conditions:
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Nominal wages will increase. (This is unlikely when output is below full-employment levels, as downward pressure on wages generally occurs.)
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Unemployment will fall below the natural rate. (This is also unlikely; when output is below full-employment, unemployment tends to rise above the natural rate rather than fall below it.)
So the correct selections are:
- The demand for labor will decrease.
- Nominal wages will decrease.