AGGREGATE DEMAND AND AGGREGATE SUPPLY
287
(
p
e
p
). When expectations are realized (
p
e
=
p
), the natural
rate of output is achieved with a vertical
AS
curve.
In the mistaken expectations set-up,
AD
management could
end up destabilizing the economy because with a revision of
expectations, employment reverts to its natural rate. Accord-
ing to Friedman, given enough time, the economy tends to
self-correct and return to the natural rate of employment and
output without changes in monetary or fiscal policy.
Even when it is recognized that policy changes are needed,
policy lags can make attempts to fine-tune the economy ...
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