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FEDERAL INSURANCE CONTRIBUTIONS ACT: Commonly abbreviated FICA, this act passed in 1939 established payroll deductions from wage-earning employees and the employers for the Social Security system. This is the noted Social Security tax that wage earners pay and which is then used to provide Social Security benefits to the elderly, disable, and qualified dependents.

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Lesson 16: Aggregate Shocks | Unit 2: Extension Page: 5 of 21

Topic: Self-Correction <=PAGE BACK | PAGE NEXT=>

The aggregate market has a perpetual inclination to adjust from short-run equilibrium to long-run equilibrium.
  • The aggregate market self-correction mechanism relies on wages, the key production cost determinant.
  • Short-run labor market imbalances induce wage changes that move the aggregate market to long-run equilibrium.

A recessionary gap Unemployment causes lower wages and production costs, and an increase in short-run aggregate supply.

An inflationary gap Labor market imbalances increase wages and production cost, and decrease in short-run aggregate supply.

Long run equilibrium is restored in both cases.


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AGGREGATE MARKET SHOCKS

Disruptions of the equilibrium in the aggregate market (or AS-AD model) caused by shifts of the aggregate demand, short-run aggregate supply, or long-run aggregate supply curves. Shocks of the aggregate market are associated with, and thus used to analyze, assorted macroeconomic phenomena such as business cycles, unemployment, inflation, stabilization policies, and economic growth. The specific analysis of aggregate market shocks identifies changes in the price level (GDP price deflator) and real production (real GDP). Changes in the price level and real production have direct implications for the unemployment rate, the inflation rate, national income, and a host of other macroeconomic measures.

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