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Long-Run Adjustment

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The ability for the economy to eliminate any imbalances between actual and potential output is sometimes called self-correction. Using an aggregate supply and aggregate demand diagram, show why this self-correcting process involves only temporary periods of inflation or deflation.

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The solution shows why the self-correcting process involves only temporary periods of inflation or deflation.

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The automatic process through which the aggregate market adjusts from short-run equilibrium to long-run equilibrium is called self-correction. Self-correction results through shifts of the short-run aggregate supply curve caused by changes in wages and other resource prices. Short-run equilibrium in the aggregate market ...

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