When Output Deviates from the Natural Level of Output, the Economy

question 30

Essay

When output deviates from the natural level of output, the economy is believed to "self- correct" over time. That is, the economy will return to the natural level of output without any policy intervention. First, explain how this process works when output is below the natural level of output. Second, briefly discuss what factors would hinder this self- correcting adjustment when the economy is in a liquidity trap.

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Definitions:

X-ray Diffraction

A technique used to determine the atomic and molecular structure of a crystal, by measuring the angles and intensities of X-rays that are scattered by the crystal.

Watson

Refers to James Watson, who, along with Francis Crick, Maurice Wilkins, and Rosalind Franklin, is credited with discovering the double helix structure of DNA.

Crick

Francis Crick, a British molecular biologist, biophysicist, and neuroscientist, known for co-discovering the structure of DNA along with James D. Watson.

Griffith's Transformation

A process discovered by Frederick Griffith in 1928, demonstrating that a substance from dead bacteria could genetically transform living bacteria.