Wages that rise rapidly during boom conditions and labor shortages, do not fall as quickly or sufficiently during recessionary conditions to cause much significant fall in per unit cost of production to cause any substantial downward (rightward) shift in the SRAS curve. As the experience of many economists during recession suggest, there is a certain amount of downward stickiness or rigidity as wage rate decreases very slowly or may not decrease at all in the recessionary phase. Thus, the per unit cost does not decline much or the fall is very slow thus cause only a small and sluggish downward shift in the SRAS curve. This weakens the automatic adjustment mechanism and it takes a long time for the economy to move back to the position of full employment GDP. The recessions are thus prolonged and recovery is slow.
To enable the economy to recover from the recessionary phase and restore full employment as early as possible the government must adopt stabilization policy that makes an upward shift in the AD curve. In the absence of such a policy unemployment can persist for quite long periods.SUBMIT ASSIGNMENT NOW!