According to those who favor a passive approach to policy,a recessionary gap will be eliminated because
A)prices and wages rise rapidly
B)prices and wages are flexible
C)the aggregate demand curve will shift to the right
D)the economy automatically slows down
E)the aggregate demand curve will shift to the left

Question

Quizplus · Accepted Answer

Supporters of a passive policy believe that prices and wages are flexible, which means they can adjust to changes in the economy without the need for government intervention. As a result, if there is a recessionary gap (a situation where the economy is producing below its potential), prices and wages will adjust downwards which will increase the quantity of goods and services demanded, eventually eliminating the gap. Therefore, the best choice is B: prices and wages are flexible.

According to Those Who Favor a Passive Approach to Policy,a