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How does the economy self-correct from a recession?

Posted on April 17, 2014 at 12:05 AM

If an economy is experiencing a recession 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 be forced to take nominal wage cuts, thus lowering inflation expectations and the costs of production. The short-run aggregate supply curve will shift to the right toward the long-run aggregate supply curve until full employment is restored. The price level decreases, real GDP increases, and unemployment decreases.

AP Macroeconomics Unit 3 AD/AS & Fiscal Policy

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

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