Final answer:
Wage rates may be inflexible downward due to 'C) wage contracts', which are fixed agreements on employment conditions, causing wage stickiness in response to a decline in aggregate demand.
Step-by-step explanation:
When aggregate demand declines, wage rates may be inflexible downward, at least for a time, because of various reasons. The option that correctly explains the downward inflexibility of wage rates is 'C) wage contracts'. Wage contracts are formal agreements between employees and employers that specify the conditions of employment, including wages, and these agreements typically have a fixed duration. Because of these contracts, wages do not decrease immediately in response to a decline in aggregate demand, leading to wage stickiness and potentially contributing to unemployment in the short-run or long-run. This is contrasted with the foreign purchases effect, inflexible product prices, and the wealth effect, which are unrelated to the question of why wages tend to be inflexible downward.