Q.14 . Why do activists believe that ... [FREE SOLUTION]

Chapter 24: Q.14 (page 655)

. Why do activists believe that the economy鈥檚 selfcorrecting mechanism works slowly?

Short Answer

Expert verified

Prices, wages, and even inflation are macroeconomic variables that do not react immediately and need time to move or change to satisfy the needs of the economy at any given time.

Hence, activists believe that the economy's self correcting mechanism works slowly.

Step by step solution

Step 1. Introduction

A self-correcting mechanism is a system that allows an economy to stabilise at a point when there are no inflexible pricing or reduced wage rates. It works with the economy's self-correcting nature of demand and supply.

Self-correcting demand and supply is a process in which the economy spontaneously fills demand and supply gaps as a result of a good's demand pressuring its supply to increase or an excessive supply pressuring its demand to rise.

Step 2. Explanation

The activists believe that the economy's self-correcting mechanism works slowly since macroeconomic variables such as prices, wages, and even inflation do not react quickly and take time to move or adjust to meet the needs of the economy at any particular time. Inflation, for example, will effect wages and the pricing of goods in a given period if it exists in the economy. This can be corrected if the supply of goods increases once and then returns to its previous level, allowing the economy to stabilise as it was prior to the inflation spiral.

As a result, activists feel that the economy's self-correcting mechanism is a long and difficult process.