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:

Thermostat

A device used for regulating the temperature of a system so that the system's temperature is maintained near a desired set-point.

Cooler

A term that can refer to a device or container used to keep things cool, particularly food and drinks, by using ice or other refrigerants.

Thermometer

A device used to measure temperature, often utilizing mercury or digital sensors.

Sensation-Seeking Behaviors

Actions that are pursued to achieve heightened states of arousal or intense experiences.