The Self-Adjustment Mechanism
Recessionary Gap Self-Correction
Recessionary gap self-corrects: high unemployment → wages fall → SRAS shifts right → back to Yf at lower PL
Inflationary Gap Self-Correction
Inflationary gap self-corrects: low unemployment → wages rise → SRAS shifts left → back to Yf at higher PL
Summary of Self-Adjustment
The Debate: Self-Correct vs. Intervene?
Classical View
- •
- •
- •
- •
Keynesian View
- •
- •
- •
- •
Why Recessionary Gaps Self-Correct Slowly
Why Inflationary Gaps Self-Correct Faster
Long-Run Neutrality of Money
AP Exam Tips
- •
- •
- •
- •
- •
Common Mistakes
- •
- •
- •
- •