When Aggregate Demand Declines Unexpectedly and Wage Contracts Are Fixed

question 10

Multiple Choice

When aggregate demand declines unexpectedly and wage contracts are fixed, then inflation will

• A) increase and business firms will hire new workers.
• B) decline and firms will reduce wages.
• C) decline and business firms will lay off workers.
• D) increase and business firms will lay off workers.
• E) increase and business firms will increase wages.

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Definitions:

Retained Earnings

Retained earnings are the portion of a company's net profits that are kept within the company instead of being paid out to the shareholders as dividends. This reinvestment is often used for business expansion or to pay off debt.

External Financing Need

The amount of funding required by a firm to cover investments and growth not financed by internal cash flows.

Net Working Capital

The difference between a company's current assets and current liabilities, indicating short-term financial health and the ability to fund day-to-day operations.

Sustainable Growth Rate

The sustainable growth rate is a measure of how quickly a firm can expand its operations without needing to secure additional financing or significantly alter its financial structure.