Answer
a) Under the sticky wage theory, the economy recovers from a recession without any policy intervention by adjusting nominal wages to decrease the real wage.
Under the sticky price theory, the economy recovers from a recession without any policy intervention by slowly increasing the price level to the long run price level.
Under the misperception theory, the economy recovers from a recession without any policy intervention by increasing the quantity demanded of goods. This increased demand will increase the production of more goods.
Work Step by Step
b) Under the sticky wage theory, the speed of the recovery is determined by how much of a gap is between the nominal wage and the real wage (as well as the prices adjust).
Under the sticky price theory, the decreased production (as well as the gap between the nominal and real wage levels) needs to increase to the long run and determines how long the recession will last.
Under the misperception theory, the recession will last as long as expectations don't change and the wage levels (nominal and real) don't change.
