Question

If not all prices adjust instantly to changing economic circumstances, an unexpected fall in the price level leaves some firms with higher-than-desired prices, and these higher-than-desired prices depress sales and induce firms to ________ the number of goods and services they produce.

Answer 1

The correct answer is: reduce.

Step-by-step explanation:

According to the sticky price and wages theory, nominal wages do not change instantly with a change in prices. So even though the prices are lowered the cost of production is not. This makes production and employment less profitable. So firms reduce their output level.

Also, not all prices change instantly, as a result, some firms are left with higher prices. This reduces their demand as consumers prefer cheaper substitutes. This causes firms to reduce their output levels.