If the government and central bank do not use economic policy, which of the following is most likely to occur during an economic downturn?

• A. Inflation will be immediately controlled without government or central bank involvement.
• B. The economy may recover more slowly due to lack of intervention.
• C. Unemployment will automatically decrease without any policy action.
• D. Economic growth will accelerate as a result of no policy intervention.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the context of an economic downturn, which typically involves reduced economic activity, higher unemployment, and lower consumer spending.
2. Step 2: Recognize the role of government and central bank policies, such as fiscal stimulus or monetary easing, which are designed to support the economy by increasing demand and encouraging investment.
3. Step 3: Analyze what happens if no policy intervention occurs: without stimulus, aggregate demand remains low, which can prolong the downturn and delay recovery.
4. Step 4: Consider the natural adjustment mechanisms in the economy, such as wage and price flexibility, but note that these adjustments often take time and may not be sufficient to quickly restore full employment and growth.
5. Step 5: Conclude that without government or central bank intervention, the economy is likely to recover more slowly, as there is no active support to boost demand and reduce unemployment promptly.