The price level was 145 and the quantity of real GDP supplied was $500 billion. This year, the economy is producing at point B. The price level has fallen to 135 and the quantity of real GDP supplied has fallen to $300 billion. Government officials are confused about why the quantity of output moved from point A to point B, and they ask you for help. First, they tell you that nominal wages fell by the same percentage as the price level.

Since nominal wages fell by the same percentage as the price level, you explain that a decrease in the price level leads to (no change, a decrease, or an increase) in real wages.

This, in turn, leads to which of the following?

a) Firms hire more workers. b)Firms hire fewer workers. c)Workers mistakenly believe that their real wages have fallen and supply less labor.

b) Workers mistakenly believe that their real wages have risen and supply more labor.

Ultimately, a decrease in the price level leads to (less output, more output, or no change in level of output) being produced in the short run.