The Self-Correcting Macroeconomy Into and out of a recession the Classical Way

SRAS AD LRAS PL RGDP DL SL W QL AS-AD Labor Market 1.We begin with an economy at full employment.

SRAS AD LRAS PL RGDP DL SL W QL AS-AD Labor Market 2. Fear of future recession causes people to increase their saving, which ironically leads to a recession. Notice how the recession is shown in AS-AD and in the Labor Market, where we assume wages are flexible. AD1 DL1

SRAS AD LRAS PL RGDP DL SL W QL AS-AD Labor Market 3. Falling wages and lower prices for other resources make production cheaper for businesses, so they begin producing more. The economy returns to full employment but at a lower price level. AD1 DL1 SRAS1

Here’s the whole walkthrough: AD down  Y, PL down, Unempl. Up  Wages down  SRAS up  Y up, PL & unempl. down