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The Self-Correcting Macroeconomy

The Self-Correcting Macroeconomy. Into and out of a recession the Classical Way. AS-AD. LRAS. SRAS. PL. We begin with an economy at full employment. AD. RGDP. Labor Market. SL. W. DL. QL. AS-AD. LRAS.

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The Self-Correcting Macroeconomy

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  1. The Self-Correcting Macroeconomy Into and out of a recession the Classical Way

  2. AS-AD LRAS SRAS PL We begin with an economy at full employment. AD RGDP Labor Market SL W DL QL

  3. AS-AD LRAS 2. Fear of future recession causes people to increase their saving, which ironically leads to a recession. Notice how the recession is shown in AS-AD and in the Labor Market, where we assume wages are flexible. SRAS PL AD AD1 RGDP Labor Market SL W DL DL1 QL

  4. AS-AD LRAS 3. Falling wages and lower prices for other resources make production cheaper for businesses, so they begin producing more. The economy returns to full employment but at a lower price level. SRAS PL SRAS1 AD AD1 RGDP Labor Market SL W DL DL1 QL

  5. Here’s the whole walkthrough: AD down  Y, PL down , Unempl. Up  Wages down  SRAS up  Y up, PL & unempl. down

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