Macroeconomics
○ TheleftwardshiftoftheSRAScurvesignifesthat theeconomyisproducinglessthan before , contributing to a reduction in aggregate output(from Y₂ back to Y f ).
● New Equilibrium: The self-adjustment process continues until a new equilibrium is reached. At this point, the SRAS curve (SRAS₂) intersects the AD curve (AD₂). This new equilibrium represents a balanced state where aggregate demand and aggregate supply are once again in harmony . ● Long-Run Equilibrium: Importantly, this new short-run equilibrium(SRAS₂andAD₂)alsoalignswiththeLRAScurve atpointC. Thisindicatesthattheeconomyhasreturnedto a long-run equilibrium . ● Eliminating the Inflationary Gap: The entire process described above, including the increase in wages, the
leftward shift of the SRAS curve, and the attainment of a new equilibrium, effectively eliminatestheinflationarygap .ThegapbetweenactualandpotentialGDPisclosed,and price levelsstabilize,butathigherlevels .Thissupportstheideathat achangeinADinthelongrun onlyaffectsthepricelevelandnottheoutput .Foroutputtochangeinthelongrun,LRAShas to shift due to the factors discussed in Section D (a change in the quantity and quality of resources). In summary, the concept of the economy's self-correcting mechanismsuggeststhat, inthelongrun, theeconomytendstoreturntofullemploymentanditspotentialoutputlevelthroughadjustments inwagesandotherprices .Thisideaiscentraltounderstandinghowtheeconomyrespondstodemand shocks and fluctuations in output. Notable: ● The concept of the self-correcting mechanism is rooted in Classical economic theory ,which suggeststhatmarketforces,includingadjustmentsinwagesandprices,willeventuallybringthe economy back to its long-run equilibrium. ● In the long run, the wage rate and other input prices can adjust to changes in economic conditions. This adjustment process allows the economy to reach full employment and its potential output level. ● While the self-correcting mechanism plays a signifcant role in macroeconomic theory, it is important to note that the speed and effciency of this adjustment can vary depending on factors like the flexibility of labor markets, the presence of price rigidities, and government policies. ● Whiletheself-adjustmentmechanismisapowerfultoolforaddressinginflationarygaps, itcan also result in unemployment as wages rise . The trade-off between inflation and unemployment is a key consideration for policymakers.
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