What is meant by an economy's self correcting mechanism? Explain the process through which self correcting mechanism reduces inflationary gap
The economy's self correcting mechanism refers to the way money wages react to either a recessionary gap or an inflationary gap. Wage changes shift the aggregate supply curve and therefore change equilibrium GDP and the equilibrium price level.
If aggregate demand is exceptionally high, the economy may reach a short-run equilibrium above full employment. When this occurs, the tight situation in the labor market soon forces nominal wages to rise. Because rising wages increase business costs, prices increase. As higher prices cut into consumer purchasing power and net exports, the inflationary gap begins to close.
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Suppose that there are 175 voters in an election and that 80 of them prefer a $100 budget while the remainder prefer a $150 budget. Which of the following statements is true?
a. The Condorcet Paradox predicts that the $100 budget will win even though fewer people prefer that budget. b. The median voter theorem predicts that the winning budget will be $125, the median of the preferences of the two types of voters. c. Arrow's impossibility theorem says that the winning budget cannot be determined in this election since there is no unanimity. d. None of the above.
Inflation distorts relative prices. What does this mean and why does it impose a cost on society?
The ________ approach relies on the right discretionary policy to close the gap through a ________ of the aggregate demand curve
a. passive; decrease b. active; increase c. passive; increase d. active; decrease
Sometimes, the taxes with the smallest excess burden are
A. progressive. B. regressive. C. proportional. D. digressive.