Final answer:
When output falls below full-employment level, the demand for labor decreases, unemployment falls below the natural rate, and nominal wages decrease. The correct option is C.
Step-by-step explanation:
When output falls below the economy's full-employment output level, several adjustments occur:
The demand for labor will decrease. As output decreases, firms require fewer workers to produce goods and services.
Unemployment will fall below the natural rate. If output falls below full employment, there will be a surplus of labor, resulting in unemployment.
Nominal wages will decrease. When there is excess supply of labor, workers may need to accept lower wages in order to find employment.
Nominal wages will not increase in this scenario, as there is a labor surplus and firms have less incentive to offer higher wages.
When output is below the full employment level, nominal wages will decrease, and demand for labor will decrease. Unemployment does not fall below the natural rate, and nominal wages do not increase in this scenario.
When output falls below the economy's full-employment output level, the following adjustments occur:
The demand for labor will decrease: As companies produce less due to the drop in output, they need fewer workers, resulting in decreased labor demand.
The option that unemployment will fall below the natural rate is incorrect, as unemployment tends to rise when output is below full employment levels. Similarly, nominal wages will not increase in this case as the labor market is not tight, and there is less upward pressure on wages when the economy is not producing at full capacity.