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SELF-CORRECTION, INFLATIONARY GAP: The automatic process through which the aggregate market achieves long-run equilibrium by eliminating an inflationary gap created by short-run equilibrium. With an inflationary gap short-run equilibrium real production is greater than full-employment real production, meaning resource markets have shortages, and in particular labor is overemployed. Self-correction is the process in which these temporary imbalances are eliminated through flexible prices as the aggregate market achieves long-run equilibrium. The key to this process is shifts of the short-run aggregate supply curve caused by changes in wages and other resource prices. The long-run result is lower wages and a decrease in short-run aggregate supply.

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Lesson 13: Aggregate Demand | Unit 5: Policies Plus Page: 20 of 22

Topic: Business Cycles <=PAGE BACK | PAGE NEXT=>

The consumption, investment, government purchase, and net export determinants cause the aggregate demand curve to shift and lead to macroeconomic instability.
  • This instability is best viewed in terms of business cycles. The effects of business-cycle instability are:
    • Recession. Means higher unemployment rates and related problems.
    • Booming Expansion. Possibility of higher inflation rates and related problems.
Aggregate demand is the prime source of economic instability.

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MARGINAL REVENUE CURVE, MONOPOLISTIC COMPETITION

A curve that graphically represents the relation between the marginal revenue received by a monopolistically competitive firm for selling its output and the quantity of output sold. Because a monopolistically competitive firm is a price maker and faces a negatively-sloped demand curve, its marginal revenue curve is also negatively sloped and lies below its average revenue (and demand) curve. A monopolistically competitive firm maximizes profit by producing the quantity of output found at the intersection of the marginal revenue curve and marginal cost curve.

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A lump of pure gold the size of a matchbox can be flattened into a sheet the size of a tennis court!
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