The assumption that wages and prices are downwardly flexible in the long run allows for which of the following?

Question

Multiple choice question.

The economy to return to full employment without government intervention

The government and the private sector to affect aggregate demand

The short-run aggregate supply curve to shift to the left

The government to actively intervene during a recession

Answer 1

The assumption that wages and prices are downwardly flexible in the long run allows for:

The economy to return to full employment without government intervention.

This is because if wages and prices can adjust downward, the economy can self-correct after a recession, restoring full employment over time without the need for government intervention.