What is meant by an economy's self correcting mechanism? Explain the process through which self correcting mechanism reduces inflationary gap
The economy's self correcting mechanism refers to the way money wages react to either a recessionary gap or an inflationary gap. Wage changes shift the aggregate supply curve and therefore change equilibrium GDP and the equilibrium price level.
If aggregate demand is exceptionally high, the economy may reach a short-run equilibrium above full employment. When this occurs, the tight situation in the labor market soon forces nominal wages to rise. Because rising wages increase business costs, prices increase. As higher prices cut into consumer purchasing power and net exports, the inflationary gap begins to close.
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An increase in which of the following is most likely to cause the short-run aggregate supply curve to shift to the left?
A) Consumers' income B) The money supply C) Government spending D) The optimism of business firms E) The per unit cost of production
Assume that net exports are -$340, private investment is $1500, tax revenues are $800, government purchases are $2000 . and GDP - using the expenditure approach - is $9,000 . In this case, consumption expenditures must be
a. $1,840 b. $12,960 c. $5,840 d. $4,360 e. $5,160