AP Macroeconomics
The Economy Fixes Itself: Long-Run Self-Adjustment
Long-run self-adjustment is the economy's automatic mechanism that returns it to full employment without government intervention. This process occurs through wage adjustments that shift the short-run aggregate supply curve, closing output gaps over time.
Key Takeaways
- What causes self-adjustment? (Wages adjust to output gaps)
- In a Recessionary Gap: Nominal wages fall → SRAS shifts right → Economy returns to full employment
- In an Inflationary Gap: Nominal wages rise → SRAS shifts left → Economy returns to full employment
- Why is it "Long-Run"? (Wage adjustments take time to occur)
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Draw an economy in an inflationary gap. Show the long-run self-adjustment mechanism without government intervention.
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Learn MoreInstructions
Draw an economy in an inflationary gap. Show the long-run self-adjustment mechanism without government intervention.
Check Your Understanding
Question 1 of 3
The economy's long-run self-adjustment mechanism primarily relies on the flexibility of which of the following?
Government spending
Nominal wages and other resource prices
The money supply
Consumer confidence