The fact that an economy always returns to the natural rate level of output is known as
A)the excess demand hypothesis.
B)the price-adjustment mechanism.
C)the self-correcting mechanism.
D)the natural rate of unemployment.

Question

Quizplus · Accepted Answer

The self-correcting mechanism refers to the fact that an economy always returns to the natural rate level of output in the long run, even after experiencing temporary shocks or deviations from this level of output. This is due to the adjustment of prices and wages that eventually lead to a restoration of equilibrium in the economy. The excess demand hypothesis refers to the idea that aggregate demand shocks can lead to persistent unemployment, while the price-adjustment mechanism is a part of the self-correcting mechanism that involves changes in relative prices in response to changes in supply and demand. The natural rate of unemployment refers to the level of unemployment that exists when the economy is producing at its potential output level.

The Fact That an Economy Always Returns to the Natural