An economy is likely to recover from a recession quickly (without government intervention)when
A)it is caused by a negative supply shock and wages are fixed.
B)it is caused by a leftward shift in aggregate demand and wages are fixed.
C)it is caused by a leftward shift in aggregate demand and wages are flexible.
D)it is caused by a financial crisis.
E)it is caused by a leftward shift in aggregate supply and output prices are fixed.

Question

Quizplus · Accepted Answer

When a recession is caused by a leftward shift in aggregate demand and wages are flexible, firms can reduce their production costs by reducing wages, which will eventually lead to an increase in aggregate supply and an increase in output. This process is known as wage stickiness, and it helps the economy to recover from a recession quickly. In contrast, if wages are fixed, firms will not be able to reduce their production costs, and the economy will take longer to recover.

An Economy Is Likely to Recover from a Recession Quickly