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How does the economy self-correct from inflation?

Posted on April 17, 2014 at 12:10 AM

If an economy is experiencing inflation in the short run, classical economists would say that the government should do nothing and the economy will correct itself in the long run. 

 

In the long run, workers will demand higher nominal wages, thus raising inflation expectations and the costs of production. The short-run aggregate supply curve will shift to the left toward the long-run aggregate supply curve until the long-run equilibrium is achieved. The price level increases, real GDP decreases, and unemployment increases.

 

AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

Categories: AP Macroeconomics, Macro Unit 3 AD/AS and Fiscal Policy

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