Question

In the long run, the economy is:A) self-correcting, as commodity prices rise during recessionary gaps and fall during inflationary gaps to move the economy to long-run equilibrium. B) self-correcting, as prices of goods that are sticky in the short run become very flexible in the long run and thus move the economy to full employment. C) fluctuating, as nominal wages rise and fall during short-run economic fluctuations. D) self-correcting, as nominal wages rise during recessionary gaps and fall during inflationary gaps to move the economy to long-run equilibrium.

Answer 1

Answer: B. self-correcting, as prices of goods that are sticky in the short run become very flexible in the long run and thus move the economy to full employment.

Explanation: In a long run the economy self correct as price of goods that are sticky in the short run become very flexible in the long run and it thus being the economy to full employment.

The idea of Economy self-correcting is that when an economy is producing at an equilibrium level of output below or above its full employment, will return on its own to full employment level left on its own accord. It requires flexible wages and prices, so therefore it is only going to happen at the long run.