Suppose the advice of policymakers who favour a passive approach to policy is correct.How would a recessionary gap eventually close?
A) The aggregate demand curve would shift rightward.
B) The aggregate demand curve would shift leftward.
C) The short-run aggregate supply curve would shift rightward.
D) The short-run aggregate supply curve would shift leftward.

Question

Suppose the advice of policymakers who favour a passive approach to policy is correct.How would a recessionary gap eventually close?  
A) The aggregate demand curve would shift rightward. 
B) The aggregate demand curve would shift leftward. 
C) The short-run aggregate supply curve would shift rightward. 
D) The short-run aggregate supply curve would shift leftward.

Quizplus · Accepted Answer

According to policymakers who favour a passive approach to policy, the recessionary gap will eventually close on its own as the economy adjusts. This adjustment will involve an increase in aggregate demand as consumers and businesses become more confident about the economy's prospects. This increase in aggregate demand will cause the short-run aggregate supply curve to shift rightward, as suppliers increase production to meet the higher demand. As a result, the economy will move back closer to its potential output level, and the recessionary gap will close.

Suppose the Advice of Policymakers Who Favour a Passive Approach