As a recessionary gap self-corrects, the equilibrium price level _____ and the equilibrium real output _____.
A) rises; decreases
B) rises; increases
C) falls; decreases
D) falls; increases

Question

Quizplus · Accepted Answer

As a recessionary gap self-corrects, firms and workers adjust their expectations downwards, leading to lower wages and production costs. This makes goods and services cheaper, causing the equilibrium price level to fall. At the same time, lower production costs encourage firms to increase output, leading to an increase in equilibrium real output.

As a Recessionary Gap Self-Corrects, the Equilibrium Price Level _____