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When the price level is lower than expected, the economy ends up in a recessionary gap. In an economy where prices and wages are flexible
When the price level is lower than expected, the economy ends up in a recessionary gap. In an economy where prices and wages are flexible enough, prices and wages would adjust by falling until the economy was producing at the potential level of output again, thus ending the recession. Why aren't wages and prices more flexible downwards? Would you be willing to take a job where your pay was adjusted each month depending on the price level?
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