What is the likely outcome when a government handles a recession by remaining passive while the economy returns to full employment on its own?

Question

Multiple choice question.

Aggregate demand will increase and inflation will fall.

The recession will persist, with a large loss of output.

Unemployment will rise as wages increase.

The price level will start rising, causing a similar rise in inflation

Answer 1

The likely outcome when a government handles a recession by remaining passive while the economy returns to full employment on its own is:

The recession will persist, with a large loss of output.

This option reflects the idea that without intervention, the economy may not recover quickly, leading to prolonged high unemployment and underutilized resources.