Chapter 4R, Problem 19MCQ

To determine

To determine what leads to the self-correction when the economy is in a recessionary gap.

Explanation of Solution

When there is a recessionary gap in the economy, wages fall and short run aggregate supply curve shifts to the right.

Graphically,

  

Hence, option ‘d’ is the correct option

When there is a recessionary gap in the economy, wages and prices fall rather than rising. Hence, option (a) is incorrect.

When there is a recessionary gap in the economy, the short-run aggregate supply curves do not decrease. Hence, option (b) is incorrect.

When there is a recessionary gap in the economy, it is corrected in the short run and not in the long run. Hence, option (c ) is incorrect.

Unemployment lowers aggregate demand, rather than increasing it. Hence, option (e ) is incorrect.