According to policymakers who favour a passive approach to policy, why will a recessionary gap be eliminated by a passive approach?
A) because prices and wages will rise rapidly
B) because prices and wages are flexible
C) because the aggregate demand curve will shift to the right
D) because the aggregate demand curve will shift to the left

Question

According to policymakers who favour a passive approach to policy, why will a recessionary gap be eliminated by a passive approach?  
A) because prices and wages will rise rapidly 
B) because prices and wages are flexible 
C) because the aggregate demand curve will shift to the right 
D) because the aggregate demand curve will shift to the left

Quizplus · Accepted Answer

Policymakers who favour a passive approach to policy believe that prices and wages are flexible and will adjust on their own to eliminate a recessionary gap. As prices and wages fall in a recession, they will eventually reach a level that makes it profitable for businesses to increase production and hire more workers, thus increasing aggregate demand and shifting the equilibrium back towards full employment. Therefore, according to this view, no active policy intervention is needed to eliminate the recessionary gap.

According to Policymakers Who Favour a Passive Approach to Policy