📚 Learning Guide
Long Run Economic Adjustment
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If an economy is seen moving from a recessionary output gap back to full employment due to a decrease in resource prices, which of the following is the most likely cause behind this adjustment?

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Choose the Best Answer

A

Increased demand for goods and services

B

Decrease in nominal wages and input costs

C

Government intervention in the economy

D

Increase in taxes on businesses

Understanding the Answer

Let's break down why this is correct

Answer

When an economy is in a recession, it means that it is not producing as much as it could, and many people are out of work. If resource prices, like the costs of raw materials or wages, decrease, it becomes cheaper for businesses to produce goods and services. This can encourage companies to hire more workers and increase their production, helping the economy move back toward full employment. For example, if the price of steel falls, a car manufacturer can produce more cars at a lower cost, leading to more jobs and economic activity. Therefore, the most likely cause of the adjustment back to full employment is that lower resource prices make it easier for businesses to grow and hire more people.

Detailed Explanation

When resource prices go down, it costs less to make things. Other options are incorrect because Some might think that more demand alone fixes the economy; People may believe that government actions are always needed to fix the economy.

Key Concepts

Long Run Economic Adjustment
Short-Run Aggregate Supply (SRAS)
Recessionary Output Gap
Topic

Long Run Economic Adjustment

Difficulty

medium level question

Cognitive Level

understand

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