Question

If a recessionary gap were to appear, how
might the economy adjusts
Can/should we rely on it to adjust itself? is it
possible that the economy
will never adjust to a gap, and things will just
get worse and worsen

Answer 1

Recession is characterized by the fall in aggregate demand and such fall causes fall in output and employment level in an economy. Classical economists strongly believe that such fall in aggregate demand can be rectified with help of free market system and government does not need to take part in this process.

But as our experience shows that market forces might take longer time to restore equilibrium. Thus, government must actively pursue objective of restoring equilibrium by pushing up expenditure and thereby driving aggregate demand up.

Thus is not true that situation will go on becoming worse if no action is taken. Economy will automatically return to equilibrium over the long run. But there would be utter chaos and mass unemployment in short run. Thus situation should dealt with help of economic actions by the government.

Wage rate and prices are flexible enough over the long run, thus equilibrium can be regained but if government wants to set thing right in short run, it must actively participate in economic process.