The long-run self-correcting mechanism that eliminates an inflationary gap (Y Y_P) in the economy assumes that:

Question

The long-run self-correcting mechanism that eliminates an inflationary gap (Y > Y_P) in the economy assumes that:

Quizplus · Accepted Answer

The long-run self-correcting mechanism in an economy with an inflationary gap involves increases in wages and production costs due to higher demand for labor and resources, which in turn can lead to higher inflation rates. These adjustments eventually decrease the aggregate demand, bringing the actual output closer to the potential output, thus correcting the gap over time.

The Long-Run Self-Correcting Mechanism That Eliminates an Inflationary Gap (Y