The fact that an economy always returns to the natural rate level of output is known as?

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02-08-2022
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The fact that an economy always returns to the natural rate level of output is known as?

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tripatsingh039 tripatsingh039 · Answer 1 · 2022-08-10T21:44:58+02:00

The fact that an economy always returns to the natural rate level of output is known as option(c)i.e, the self-correcting mechanism.

The fundamental tenet of the self-correction process is that short-term shock effects are all that count. In the near term, but not in the long term, output and unemployment will alter if AD changes.

The flexibility of salaries and resource pricing is the main self-correcting mechanism. During a recession, prices for resources and wages both drop, making them more affordable. The gradual restoration of long-term equilibrium is facilitated by producers using more resources to boost production when resources are more affordable.

Self-correction is understood as alterations in the short-run aggregate supply curve brought on by adjustments in the pricing of labor and other resources. With reduced wages and a rise in the short-run aggregate supply curve, the self-correction mechanism works to close a recessionary gap.