For those who favor an active approach,public policy changes are necessary to cure a recessionary gap because
A)the short-run aggregate supply curve will otherwise shift quickly to the right
B)prices and wages are flexible downward but not upward
C)the required decrease in output can be achieved only by shifting the AD curve
D)real wages must fall through price increases rather than waiting for money wages to fall
E)falling money wages will cause the AD curve to shift leftward unless policy counters this movement

Question

Quizplus · Accepted Answer

In a recessionary gap, real wages need to fall to restore full employment. Since wages are sticky downward, prices need to increase to reduce real wages, which can be facilitated by policy changes that increase aggregate demand.

For Those Who Favor an Active Approach,public Policy Changes Are