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Macroeconomics

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Moderate

Classical Economics and a Recessionary Gap

MACRO-XAWFCS

During the recent 2008 financial crisis in the U.S. the economy was in a recessionary gap. Which of the following would have occurred if classical theory is correct?

A

Workers' wages would have risen substantially and caused the demand for labor to fall causing a spike in unemployment.

B

Workers' wages would have remained stagnant and we would have experienced a persistent recessionary gap.

C

Workers' wages would have fallen and stimulated enough demand for labor in order to restore employment to pre-crisis levels.

D

Workers' wages would have fallen but not enough to stimulate demand for labor resulting in a persistent recessionary gap.