Long-Run Self-Adjustment
| English | Chinese | Pinyin |
|---|---|---|
| self-stabilizing | 自我稳定 | zì wǒ wěn dìng |
The economy heals itself — slowly
- What if the government does nothing about a gap?
- The AD-AS model says the economy will heal on its own, over the long run.
- The engine is the slow adjustment of the sticky wages and input prices that fixed SRAS.
- It just takes time — sometimes a painful amount of it.
Closing a recessionary gap
- Output is below potential, so unemployment is high.
- With many workers looking, they eventually accept lower nominal wages, and input costs fall.
- Lower costs shift SRAS rightward, along the fixed AD.
- Output rises back to potential and the price level falls — full employment returns on its own.
The AD-AS model
Left alone, an economy in a gap heals by shifting SRAS — wages fall in a slump, rise in a boom — until output returns to potential.
To close a recessionary gap on its own, the economy relies on:
High unemployment eventually lowers wages, cutting costs and shifting SRAS right toward potential.
Closing an inflationary gap
- Output is above potential, so labour and materials are scarce.
- Workers win higher nominal wages, and input prices rise.
- Higher costs shift SRAS leftward; output falls back to potential while the price level rises further.
- Either way, self-adjustment moves SRAS, not AD, until the crossing returns to LRAS.
To close an inflationary gap on its own, nominal wages:
Scarce labour wins higher wages, raising costs and shifting SRAS left back to potential.
Self-adjustment works by shifting the ______ curve, not AD, back onto LRAS.
Wages and input prices move SRAS until the crossing lands on LRAS at potential.
Long run vs short run
- Real output always returns to potential — in the long run the economy is self-stabilizing 自我稳定.
- The price level does not return to where it started: a recessionary gap ends at a lower price level, an inflationary gap at a higher one.
- So a shift in AD changes output only temporarily; its lasting effect is on the price level alone.
- This is why LRAS is vertical: in the long run, only prices move.
In the long run, self-adjustment always returns real output to potential.
Output is fixed by real resources in the long run, so it always heals back to potential.
After a recessionary gap self-corrects, the price level ends up:
Output returns to potential, but a recessionary gap self-corrects to a lower price level.
Because output always returns to potential, the economy is said to be self-stabilizing in the long run.
A shift in AD changes output only temporarily; its lasting effect is on the price level.
Left alone, the economy self-adjusts by shifting SRAS: a recessionary gap pulls wages down (SRAS right), an inflationary gap pushes wages up (SRAS left), until output returns to potential. Output always recovers; the price level ends lower (recession) or higher (boom) than before.