Prior to the Great Depression, most economists believed that a recessionary downturn would be reversed by
A) higher wages that would stimulate aggregate demand and reduce unemployment.
B) lower wages that would increase the quantity of labor demanded and reduce unemployment.
C) an expansionary monetary policy on the part of the Federal Reserve System.
D) an increase in government spending that would stimulate aggregate demand and employment.

Question

Quizplus · Accepted Answer

Prior to the Great Depression, most economists believed in the classical theory, which asserted that wages and prices were flexible and would adjust quickly to changes in supply and demand. Therefore, in the event of a recession, they believed that lower wages would increase the quantity of labor demanded and reduce unemployment, leading to economic recovery. However, this theory did not account for the possibility of a large and prolonged downturn like the Great Depression.

Prior to the Great Depression, Most Economists Believed That a Recessionary