The economy's self-correcting mechanism
A)tends to push unemployment toward a specific point called the natural rate of unemployment.
B)works better at correcting inflationary gaps than recessionary gaps.
C)cannot work if the Phillips curve is vertical.
D)ensures that the economy will not have to endure a long period of high unemployment.

Question

Quizplus · Accepted Answer

The economy's self-correcting mechanism tends to push unemployment towards the natural rate of unemployment, which is the lowest level of unemployment that can be sustained without causing inflation. This is because as unemployment falls below the natural rate, labor markets become tighter and workers have more bargaining power which leads to higher wages and prices. As a result, businesses face higher costs and lower profitability which leads to a reduction in output and employment. Conversely, when unemployment is above the natural rate, labor markets are slack, and businesses face lower costs, which can lead to higher output and employment in the economy. The self-correcting mechanism works to move the economy towards this natural rate of unemployment.

The Economy's Self-Correcting Mechanism