Walker411
New Contributor
I just got out of my macro economics class and we spent most of the time covering the "self correcting mechanism" of our economy and the recessing/inflationary gaps. Basically the idea is that if we are in a recession and producing below our potential GDP, there are two things that will happen. The first is that interest rates will decline, causing businesses to invest and our nations aggregate expenditures to rise. The second is that prices will fall, causing real wealth to rise so people can consume more. This will also cause aggregate expenditures to rise. The economy will slowly return to equilibrium.
According to the self correcting mechanism, the economy will also fix itself during inflationary periods. During an inflationary period we are producing beyond our potential GDP, most likely over-working employees and using resources inefficiently. This causes wages to rise, prices to rise, real wealth to decline, consumption to decline, and aggregate expenditures to decline. Over time, our economy will also return to equilibrium.
History and records have proven this to be true of our system. It really does work.
So now my question is... if we have set up an economic system that can correct and heal itself, why do we bother touching it? Why did we pour billions into stimulus packages? Are we forcing things just to force things? I am not trying to start any debates, I'm just trying to understand what the idea is behind all of this!
-Tim
According to the self correcting mechanism, the economy will also fix itself during inflationary periods. During an inflationary period we are producing beyond our potential GDP, most likely over-working employees and using resources inefficiently. This causes wages to rise, prices to rise, real wealth to decline, consumption to decline, and aggregate expenditures to decline. Over time, our economy will also return to equilibrium.
History and records have proven this to be true of our system. It really does work.
So now my question is... if we have set up an economic system that can correct and heal itself, why do we bother touching it? Why did we pour billions into stimulus packages? Are we forcing things just to force things? I am not trying to start any debates, I'm just trying to understand what the idea is behind all of this!
-Tim
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