Introduction
The paper discusses the implication of upwardly flexible, but downwardly inflexible wages and how long it takes to recover from recessionary and inflationary gap. The second part of the paper focuses on how this rigidity of wages limits the balancing of the cyclic budget.
Question 1
In case of recessionary gap, the economy is operating under the full employment in the short-term. This is because of the fact that the wages are so high for the firms to employ more workers. Since wages are flexible upwards and sticky downwards, it would be difficult to lower the wages in order to attain ...