Suppose the economy is experiencing a recessionary gap. In the long run, if aggregate demand does not change the money wage rate _ _, unemployment , and the price level .
A) falls; rises; falls
B) rises; rises; rises
C) falls; falls; falls
D) rises; falls; rises

Question

Quizplus · Accepted Answer

In the long run, the economy will adjust to the recessionary gap and return to potential GDP. If the money wage rate does not change, it means that labor costs will remain constant, and firms will not be incentivized to hire or fire workers. As a result, unemployment will remain unchanged. However, since potential GDP implies that resource utilization is at its maximum level, there will be downward pressure on prices as firms compete for a limited pool of customers. Therefore, the price level will fall in the long run.

Suppose the Economy Is Experiencing a Recessionary Gap