Figure 17-2

-Given the situation in graph (1) in Figure 17-2, what action could be expected from the economy's self-correcting mechanism?

Question

Figure 17-2
 
-Given the situation in graph (1) in Figure 17-2, what action could be expected from the economy's self-correcting mechanism?

Quizplus · Accepted Answer

The economy's self-correcting mechanism would lead to an increase in aggregate supply, as shown by the shift from AS1 to AS2 in graph (2) of Figure 17-2. This is because the decrease in aggregate demand shifts the economy to a lower equilibrium real GDP and higher unemployment, which in turn decreases input costs and eventually leads to a decrease in the general price level. As the price level falls, firms experience lower input costs and are incentivized to increase production and supply, eventually shifting the aggregate supply curve to the right.

Figure 17-2 -Given the Situation in Graph (1) in Figure 17-2, What