What would be the likely result of a recessionary gap? If this leads to a fall in the nominal wage what impact it would have on the aggregate supply curve and on recessionary gap?
What will be an ideal response?
With equilibrium GDP below potential GDP, jobs will be difficult to find and the number of unemployed will increase in the economy. Businesses will have little trouble finding workers, and their current employees will be eager to hang on to their jobs. Such an environment makes it difficult for workers to win wage increases. Indeed, in extreme situations, wages may even fall thereby shifting the aggregate supply curve outward. This will ultimately lead to a fall in the price level and deflation gradually erodes the recessionary gap.
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