Suppose a recessionary gap exists and resource prices are NOT flexible downward.What will be the effect on the short-run aggregate supply curve?
A) It will shift leftward, to return the economy to its potential output.
B) It will shift rightward, to return the economy to its potential output.
C) It will remain the same, and the recessionary gap will continue.
D) It will become the long-run aggregate supply curve.

Question

Suppose a recessionary gap exists and resource prices are NOT flexible downward.What will be the effect on the short-run aggregate supply curve?  
A) It will shift leftward, to return the economy to its potential output. 
B) It will shift rightward, to return the economy to its potential output. 
C) It will remain the same, and the recessionary gap will continue. 
D) It will become the long-run aggregate supply curve.

Quizplus · Accepted Answer

When resource prices are not flexible downward, the short-run aggregate supply curve will not shift leftward to return the economy to its potential output. Instead, it will remain the same, and the recessionary gap will continue. This is because firms are unable to reduce their costs to produce goods and services, resulting in a lower level of output than potential output. In such a situation, the economy will remain in a recessionary gap until resource prices become flexible downward or until there is a shift in demand that raises prices and output.

Suppose a Recessionary Gap Exists and Resource Prices Are NOT