Question

Other things the same, if prices fell when firms and workers were expecting them to rise, then a. employment and production would rise. b. employment would rise and production would fall. c. employment would fall and production would rise. d. employment and production would fall.

Answer 1

Answer:

d. employment and production would fall.

Explanation:

Economic agents have expectations about the parameters of an economy, such as price, inflation, unemployment rate, etc. If the price falls while economic agents expect the opposite, in the short run production and employment tend to increase. This is because investment decisions had already been made. However, in the medium and long term, economic agents realize that price expectations have not been confirmed and market parameters adjust. Thus, in the face of falling prices, there will be less demand. With lower demand, there will be a decrease in production and thus the employment rate decreases.