With the self-correcting mechanism,if a negative demand shock occurs,
A) a decrease in wage rates will lead to a decrease in the price level so that the economy returns to full employment
B) the price level will increase,causing equilibrium GDP to return to its original level
C) the wage rate will eventually increase,restoring GDP to its full-employment level
D) the price level will remain constant
E) there will be no effect in the long run

Question

Quizplus · Accepted Answer

In the self-correcting mechanism, a negative demand shock initially reduces GDP and increases unemployment. Over time, wage rates decrease due to higher unemployment, reducing production costs and leading to a decrease in the price level. This helps restore the economy to full employment.

With the Self-Correcting Mechanism,if a Negative Demand Shock Occurs