The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as
A)monetary policy.
B)an automatic mechanism.
C)"releasing sticky prices."
D)fiscal policy.
E)government neutrality.

Question

Quizplus · Accepted Answer

The automatic mechanism refers to the self-correcting nature of the economy without any government intervention. When there is a recession, output, employment, and income fall, which leads to a decrease in demand for goods and services. Lower demand results in lower prices, which encourage consumers to buy more, and firms to expand production. As firms increase output, they require more labor, and employment starts to rise. The increased demand for goods also leads to an increase in the demand for inputs such as labor, capital, and raw materials, raising prices and costs. As prices increase, firms' profit margins fall, leading them to reduce prices, decrease output and reduce the demand for inputs, thus reversing the direction of prices and costs. As prices and wages adjust, the economy returns to its long-run potential GDP. This process of adjustments is automatic and continues until the economy reaches the natural level of output without the need for government intervention.

The Process of an Economy Adjusting from a Recession Back