Question

1) If the economy exhibits a recessionary gap in the short run, the real wage rate will __________________ (fall, rise), and short-run aggregate supply curve will shift __________________ (leftward, rightward).

2)

If the economy exhibits an expansionary gap in the short run, the real wage rate will __________________ (fall, rise), and short-run aggregate supply curve will shift __________________ (leftward, rightward).

Answer 1

1- fall, rightward

When the economy is in a recessionary gap, the labor market is experiencing a surplus. In a self-regulating economy, wage rates will then fall and the SRAS curve will shift to the right.

2- rise,leftward

When the economy is in an expansionary gap, the labor market is experiencing a shortage. In a self-regulating economy, wage rates will then rise and the SRAS curve will shift to the left.