A reduction of aggregate demand may raise the natural rate of unemployment above the full employment level,meaning that the self-correcting mechanism will only be able to return the economy to the natural rate level of output and unemployment-not to the full employment levels.Such a view is consistent with
A)monetarism.
B)hysterisis.
C)Keynesianism.
D)real business cycle theory.

Question

Quizplus · Accepted Answer

The mention of the "natural rate of unemployment" and the "self-correcting mechanism" suggests a discussion of hysteresis, which refers to the idea that temporary shocks to the economy can have long-lasting or permanent effects on its potential output and employment. This view is not consistent with monetarism or real business cycle theory, which emphasize the importance of market forces and price flexibility in restoring equilibrium. Keynesianism also acknowledges the possibility of hysteresis, but typically advocates for active government intervention to stimulate demand and reduce unemployment.

A Reduction of Aggregate Demand May Raise the Natural Rate