Do you agree or disagree with this statement: “A recessionary gap occurs when AD decreases. In a recession, the price level and real GDP decrease while unemployment rises. This unfortunate state of affairs will correct itself in the long run.

1. Stagflation (caused by a decrease in AS) is a combination of inflation and high unemployment. Unfortunately fiscal policy and monetary policy cannot solve both problems simultaneously. Either the government and the Federal Reserve carry out expansionary policies (more fiscal spending and lower interest rates to decrease unemployment) or they carry out contractionary policies (less fiscal spending and higher interest rates to combat inflation). Which policy do you favor, one that lowers unemployment or one that lowers inflation?

2. Do you agree or disagree with this statement: “A recessionary gap occurs when AD decreases. In a recession, the price level and real GDP decrease while unemployment rises. This unfortunate state of affairs will correct itself in the long run. As a result of higher unemployment, wages will decrease and cheaper workers will induce companies to hire more of them until the economy is back to potential (full employment) GDP. Hence, there is no need for the government to intervene in the economy when the country is experiencing a recession.”