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24)The process of an economy adjusting from a recession back to potential GDP in the long...

24)The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is possible because

Select one:

a. In the long run, wages and prices are completely flexible as per the classical model

b. In the long run, wages and prices are completely flexible as per the Keynesian model

c. In the long run we are all dead

d. Prices and wages are sticky in the short run as per what Keynes said

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Answer #1

Option a is correct. The process of an economy is adjusting from recession back to potential GDP in the long run without any government intervention is possible because in long run, wages and prices are completely flexible as per the classical model. During recession price level will be low. So it will increase the purchasing power of consumers. Thereby it will increase the aggregate demand for good and services . As a result production level increases . It will increase the output level and reaches into potential output. All other options are wrong. Because according to Keynes , government intervention should be necessary during inflation and recession

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