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From 1990 to 1995, the U.S. economy was in a recessionary gap. According to the classical...

From 1990 to 1995, the U.S. economy was in a recessionary gap. According to the classical economists, which of the following should have occurred?

Group of answer choices

all of the above should have occurred

wages should have fallen which would cause more workers to be hired

prices should have fallen which would increase consumer spending

interest rates should have fallen which would increase consumer and investment spending

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Answer #1

Option A

All of the above are correct. When the wages have fallen, the firm can hire more workers and increase productivity.

When real prices fall, the propensity to consume increases because the consumer can buy more goods for the same income he has.

Fall of interest rates means that borrowing loans from banks increase, thus leading to a greater private investment. With the fall in interest rates, consumer can save the surplus interest money and consume the same.

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