The self-correcting mechanism to return the economy to potential output from output gaps is the change in:
A)Potential output
B)Aggregate demand
C)Short-run aggregate supply
D)The real interest rate by the central bank

Question

Quizplus · Accepted Answer

The self-correcting mechanism to return the economy to potential output from output gaps is the change in short-run aggregate supply. In the short run, output gaps can be caused by fluctuations in aggregate demand or supply shocks. However, in the long run, the economy will tend to return to potential output through self-correction mechanisms. One such mechanism is the adjustment of wages and prices, which shifts the short-run aggregate supply curve until it intersects with potential output. Therefore, changes in short-run aggregate supply play a crucial role in self-correcting the economy. Potential output, aggregate demand, and the real interest rate are also important factors in the economy, but they do not constitute the primary self-correction mechanism for returning the economy to potential output.

The Self-Correcting Mechanism to Return the Economy to Potential Output