Question

Question 8: According to Classical economists, how are recessionary gaps and inflationary gaps eliminated?

A) Recessionary gaps are automatically eliminated as resource market and labor market surpluses put downward pressure on resource prices and wages, resulting in a rightward shift of the short-run aggregate supply curve.

Inflationary gaps are automatically eliminated as resource market and labor market shortages put upward pressure on resource prices and wages, resulting in a leftward shift of the short-run aggregate supply curve.


B) Recessionary gaps are automatically eliminated as resource market and labor market surpluses put downward pressure on resource prices and wages, resulting in a leftward shift of the short-run aggregate supply curve.

Inflationary gaps are automatically eliminated as resource market and labor market shortages put upward pressure on resource prices and wages, resulting in a rightward shift of the short-run aggregate supply curve.


C) Recessionary gaps are automatically eliminated as resource market and labor market surpluses put downward pressure on resource prices and wages, resulting in a rightward shift of the aggregate demand curve.

Inflationary gaps are automatically eliminated as resource market and labor market shortages put upward pressure on resource prices and wages, resulting in a leftward shift of the aggregate demand curve.


D) Recessionary gaps are automatically eliminated as resource market and labor market shortages put upward pressure on resource prices and wages, resulting in a leftward shift of the aggregate demand curve.

Inflationary gaps are automatically eliminated as resource market and labor market surpluses put downward pressure on resource prices and wages, resulting in a rightward shift of the aggregate demand curve.


Question #9: According to Keynes, how are recessionary gaps and inflationary gaps eliminated?

A) Recessionary gaps are eliminated by increases in aggregate spending, resulting in a rightward shift of the short-run aggregate supply curve. Inflationary gaps are eliminated by decreases in aggregate spending, resulting in a leftward shift of the short-run aggregate supply curve.

B) Recessionary gaps are eliminated by increases in aggregate spending, resulting in a leftward shift of the short-run aggregate supply curve. Inflationary gaps are eliminated by decreases in aggregate spending, resulting in a rightward shift of the short-run aggregate supply curve.

c) Recessionary gaps are eliminated by increases in aggregate spending, resulting in a rightward shift of the aggregate demand curve. Inflationary gaps are eliminated by decreases in aggregate spending, resulting in a leftward shift of the aggregate demand curve.

d) Recessionary gaps are eliminated by decreases in aggregate spending, resulting in a leftward shift of the aggregate demand curve. Inflationary gaps are eliminated by increases in aggregate spending, resulting in a rightward shift of the aggregate demand curve.

Answer 1

8.
A) Recessionary gaps are automatically eliminated as resource market and labor market surpluses put downward pressure on resource prices and wages, resulting in a rightward shift of the short-run aggregate supply curve.

Inflationary gaps are automatically eliminated as resource market and labor market shortages put upward pressure on resource prices and wages, resulting in a leftward shift of the short-run aggregate supply curve.

(According to Classical economists, economy is self regulating. During a recession, there is unemployment in the economy which decreases wages and prices. So, cost of production decreases, and thus production will increase, increasing SRAS and shifting it to the right so that full employment is reached. During an inflation, there is shortage of labor which increases its price, increasing the cost of production. Thus, decreasing SRAS and shift it to the right.)

9. c) Recessionary gaps are eliminated by increases in aggregate spending, resulting in a rightward shift of the aggregate demand curve. Inflationary gaps are eliminated by decreases in aggregate spending, resulting in a leftward shift of the aggregate demand curve.
(According to Keynes, recessionary gaps are eliminated through increase in AD and inflationary gaps are eliminated through decrease in AD.)