A countercyclical policy used to combat the effects of recession would shift the labor demand curve exactly back to its pre-recession level in an economy with downwardly rigid wages.

Question

Quizplus · Accepted Answer

Downwardly rigid wages mean that wages do not adjust downward quickly in response to changes in demand for labor. Therefore, a countercyclical policy may not be able to shift the labor demand curve exactly back to its pre-recession level in such an economy, as some workers may still be unemployed or underemployed even after the policy is implemented.

A Countercyclical Policy Used to Combat the Effects of Recession