Suppose Governments Adopted a Hands-Off Policy to the Economy and a Recessionary

question 97

Multiple Choice

Suppose governments adopted a hands-off policy to the economy and a recessionary gap occurred.Which of the following could, in theory, overcome this gap in the long run?  

• A) The only way for the gap to close is for the nominal wage to rise. 
• B) Such a gap could be closed if the nominal wage grew more slowly over time than the price level. 
• C) Only a strong reduction in aggregate demand could close the gap. 
• D) Inflation eventually ends such gaps.

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