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.
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Steve owns a motorcycle valued at $5,000, and that is his only asset. There is a 5 percent chance that Steve will have an accident within a year. If he does have an accident, his motorcycle is worthless
Steve's utility of wealth curve is shown in the figure above. An insurance company agrees to pay Steve the full value of his motorcycle in case of an accident if he buys the company's insurance policy. The company's operating expenses are $500 per policy. With no insurance, Steve's expected wealth is A) $4,000. B) $4,500. C) $3,500. D) $5,000.
Consider the same setup with the curved final exam as in the previous question. Now suppose the students move sequentially. Which best describes the outcome in the subgame-perfect equilibrium?
a. Brainiacs study and Numbskulls party regardless of who moves first. b. Brainiacs party and Numbskulls study regardless of who moves first. c. The party moving first studies. d. The party moving first parties.