In a self-regulating economy experiencing a recessionary gap, the most likely scenario is:
- wages fall, the SRAS curve shifts leftward, the price level rises, and real GDP falls.
This occurs because in a recessionary gap, there is a decrease in overall demand, leading to lower production levels and, consequently, higher unemployment rates. As firms adjust to these conditions, they may lower wages to reduce costs. This reduction in wages means that the Short-Run Aggregate Supply (SRAS) curve shifts to the left, resulting in higher prices due to decreased supply.
Furthermore, with wages falling, consumers have less disposable income, which can further suppress demand and potentially lead to a decline in real GDP. Hence, in this scenario, both wages and real GDP would experience a downward trend while the price level would increase due to the shift in the supply curve.