Lesson summary: Long run self-adjustment in the AD-AS model
|long-run self-adjustment||the process through which an economy will return to full employment output even without government intervention|
|economic growth||an increase in an economy’s ability to produce goods and services; in the AD-AS model economic growth is represented by an increase in the LRAS.|
How short-run shocks to aggregate demand correct in the long run
How short-run shocks to SRAS correct in the long run
Only increases in LRAS will lead to more output in the long-run
Long-run self-adjustment to positive AD shock
Long-run self-adjustment to negative AD shock
- Not every recession needs government intervention, nor does every economic boom. Once prices adjust, the economy should return to the full employment output. Of course, the historical evidence of the Great Depression tells us that sometimes this self-correction mechanism breaks down. We’ll talk more about why that breakdown occurs in upcoming lessons.
- It can be confusing to remember what is changing to cause the self-correction mechanism. Keep in mind that changes in SRAS drive the self-correction mechanism. As resource and output prices adjust to changes in the rate of inflation and unemployment, SRAS will shift to close an output gap.
- The economy of Johnsrudia is experiencing a positive output gap caused by an increase in consumption. Describe the chain of events that would lead the economy to return to producing its full employment output.
- What might prevent the self-correction mechanism from occurring?
- During the 2008 recession in the United States, a decrease in consumption and investment spending lead to a decrease in aggregate demand. Describe the chain of events that would lead the economy to return to a long-run equilibrium.