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Contrast the active policy view of the behavior of wages and prices during a contractionary gap to the passive policy view

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Contrast the active policy view of the behavior of wages and prices during a contractionary gap to the passive policy view
Answered Same Day Dec 23, 2021

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Robert answered on Dec 23 2021
123 Votes
Contrast the active policy view of the behavior of wages and prices during a contractionary gap to the
passive policy view
Answer:
A contractionary gap is defined as a situation in which actual output level is less than full employment
output level (Y*) or it is a situation in which aggregate demand is less than aggregate demand required
to achieve full employment level of output. Under contractionary gap, actual unemployment rate is
greater than natural rate of unemployment. The point A in figure1 below represents the contrationary
gap because at this point, actual output in the economy (Y1) is less than full employment output (Y*).
Figure1:
An active policy is defined as the direct intervention (either through monetary or fiscal route) in the
economy to co
ect this contractionary gap. It is based on the assumption...
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