If the economy is self-regulating and in a recessionary gap,
A) wages and prices will fall.
B) wages will fall,but prices will rise.
C) neither wages nor prices will change.
D) wages will rise,but prices will fall.
E) wages and prices will rise.

Question

Quizplus · Accepted Answer

The economy is self-regulating, meaning that it will naturally adjust to reach its equilibrium level without intervention. In a recessionary gap, there is a decrease in aggregate demand that results in an excess supply of goods and services. As a result, businesses will lower their prices to try and stimulate demand, which will eventually lead to wage reductions as well. Therefore, in a self-regulating economy in a recessionary gap, wages and prices will fall.

If the Economy Is Self-Regulating and in a Recessionary Gap