Assume that the economy is initially in a recession

Assume that the economy is initially in a recession -...

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Unformatted text preview: Assume that the economy is initially in a recession. The equilibrium level of real GDP, Y 1 , lies below the natural level, Y 2 , implying that there is less than full employment of the economy's resources. Classical economists believe that the presence of unemployed resources causes wages to fall, reducing costs to suppliers and causing the SAS curve to shift from SAS 1 to SAS 2 , thereby restoring the economy to full employment. Keynesians, however, argue that wages are sticky downward and will not adjust quickly enough to reflect the reality of unemployed resources. Consequently, the recessionary climate may persist for a long time. The way out of this difficulty, according to the Keynesians, is to run a budget deficit by increasing government expenditures in excess of current tax receipts. The increase in government expenditures should be sufficient to excess of current tax receipts....
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