Explain how the economy moves back to full employment from recession. Be sure to detail what happens to short-run aggregate supply, unemployment, equilibrium GDP and the price level

What will be an ideal response?

When an economy enters a recession, sales fall and unemployment rises via the automatic adjustment mechanism. The unemployment resulting from the recession makes workers more willing to accept lower wages. The slack demand will make firms willing to accept lower prices for their goods. In addition, the decline in the price level that occurs when the economy went into recession also makes workers willing to accept lower wages, and firms accept lower prices. This shifts the short-run aggregate supply curve to the right and moves the economy back toward potential GDP. Unemployment falls back to the natural level, and the price level falls.