Question 1
If firms believe that a downturn in sales and output is temporary and that increased output will be needed in the future, they may choose to
◦ fire all their workers.
◦ sell off the plant.
◦ close a plant permanently.
◦ reassign their workers to different jobs.
Question 2
At low levels of output, the economy can expand with little or no increase in the overall price level because
◦ at low levels of output the aggregate supply curve is negatively sloped.
◦ people will be expecting the price level to fall.
◦ there is excess supply so prices are kept low.
◦ firms likely hold excess labor and capital, and production can be increased without causing input prices to increase.