Describe the mainstream view of self-correction in the economy.

What will be an ideal response?

The mainstream view of self-correction suggests that price and wages may be inflexible downward in the economy. Graphically, a decrease in aggregate demand will decrease real output, but not the price level because nominal wages will not decline and cause the short-run aggregate supply curve to shift right. The economy can get stuck in a recession for a long time period.
Downward wage inflexibility primarily arises because of wage contracts and the legal minimum wage, but they may also occur from efficiency wages and insider-outsider relationships according to the mainstream view of self-correction in the economy. An efficiency wage minimizes the firm’s labor cost per unit of output, but may be higher than the market wage. This higher wage may result in greater efficiency because it stimulates greater work effort, requires less supervision costs, and reduces job turnover. Insider-outsider relationships may also produce downward wage inflexibility. During a recession, outsiders (who are less essential to the firm) may try to bid down wages to try to keep their jobs, but the firm may not lower wages because it does not want to alienate insiders (who are more essential to the firm) and disrupt the cooperative environment in the firm that is needed for production.