Self-Correct

Definition

Self-correction refers to the ability of an economy to return to its potential level of output on its own after experiencing a shock. The self-correction mechanism involves adjustments in wages, prices, and expectations that restore equilibrium in the long run.

Related terms

Sticky Prices/Wages: Sticky prices/wages refer to situations where prices and wages do not adjust immediately or frequently in response to changes in market conditions or shocks.

Inflationary Gap: An inflationary gap occurs when aggregate demand exceeds an economy's potential output level, leading to upward pressure on prices.

Flexible Exchange Rates: Flexible exchange rates are exchange rates that are determined by market forces rather than being fixed by government policies.