True or false: The extended AD-AS model predicts that the economy will, in the long run, adjust to a recession caused by declining AD through a drop in nominal wages, which brings the economy back to full employment.

Question

True or false: The extended AD-AS model predicts that the economy will, in the long run, adjust to a recession caused by declining AD through a drop in nominal wages, which brings the economy back to full employment.
True false question.
True
False

GPT-4o mini · Answer

True.

In the extended Aggregate Demand-Aggregate Supply (AD-AS) model, it is generally believed that in the long run, the economy will adjust to a recession caused by declining aggregate demand (AD) through a decrease in nominal wages. This drop in wages can lead to a rightward shift in the short-run aggregate supply (SRAS) curve, ultimately bringing the economy back to full employment.