Author Question: How is a firm's labor demand affected during a recession if wages are downwardly rigid? What will ... (Read 60 times)

xclash · **on:** Jun 30, 2018

How is a firm's labor demand affected during a recession if wages are downwardly rigid?

What will be an ideal response?

Question 2

A change in the reserve requirement is used infrequently by the Fed because it

A) does not affect bank reserves. B) does not influence the money supply.
C) is disruptive to the banking system. D) does not affect the money multiplier.

Ahernandez18 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

The labor demand curve shifts to the left during a recession. With flexible wages, this leads to a fall in equilibrium wage and employment. However, if wages are downwardly rigid, firms are unable or unwilling to cut wages because of contractual restrictions or because of morale problems that would result from falling wages. As a result, they end up laying off more workers than they would have otherwise. With downwardly rigid wages, a leftward shift in the labor demand curve causes employment to fall by even more than it would if wages are flexible.

Answer to Question 2

C