An economy adjusts on its own to close a recessionary gap because there is
A) pressure on nominal wages to fall and this shifts the SRAS curve rightward.
B) pressure on nominal wages to rise and this shifts the SRAS curve rightward.
C) pressure on nominal wages to fall and this shifts the SRAS curve leftward.
D) pressure on nominal wages to rise and this shifts the SRAS curve leftward.

Question

Quizplus · Accepted Answer

In a recessionary gap, there is a surplus of goods and services, leading to a decrease in prices. As prices fall, there is pressure on nominal wages to also decrease. This decrease in nominal wages shifts the SRAS curve rightward, as firms can produce more at lower costs. This leads to an increase in output and a closing of the recessionary gap. Hence, the correct choice is A.

An Economy Adjusts on Its Own to Close a Recessionary