Assume that the economy is currently in a recession phase. The self-adjustment mechanisms will lead to:
A) lower wages, lower factor prices, rightward shift of the AS curve and eventual rightward shift of the AD curve until recessionary gaps are removed.
B) lower wages, lower factor prices, rightward shift of the AS curve and downward movements across the given AD curve until recessionary gaps are removed.
C) higher GDP gap, lower wages and lower prices until potential GDP is reached.
D) lower prices, increases in the aggregate demand leading to the rightward shift of the AD curve untilrecessionary gaps are removed.

Question

Quizplus · Accepted Answer

In a recession, self-adjustment mechanisms in the economy typically involve lower wages and lower factor prices due to decreased demand for labor and inputs. This leads to a rightward shift of the Aggregate Supply (AS) curve as production becomes cheaper. The economy moves down along the given Aggregate Demand (AD) curve due to lower prices, reducing the recessionary gap without necessarily shifting the AD curve rightward initially. This process helps in closing the gap between actual and potential GDP.

Assume That the Economy Is Currently in a Recession Phase