Question

Suppose the economy is self regulating and is characterized by a recessionary gap. In the long run the the price level will ----- and Real GDP will ----- Α . rise, fall rise, rise fall, rise Your answer fall, fall

Answer 1

in case of recessionary gap real GDP is less than full GDP level of output... Aggregate demand is less , it can be due to decline in consumption, investment... therefore prices will fall in long run.. another problem which arises with recession is unemployment increases as unemployment require less labor due to fall in demand , nominal wages increases in unemployment in short run due to price fall but but in long run workers will start working at lower wages due to increased unemployment.  with decreased price and nominal wages, demand and production increases due to self adjustment and real GDP will start increasing upto the full employment level

this situation can be faster achieved if  govt interferes in the market by providing expansionary stimulus to the economy.

c. fall, rise