Social Sciences and History / Unit 15 SSH 1420 short lesson, about 20 seconds
Flexible Prices Return the Economy to Potential
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The idea
The neoclassical perspective holds that in the long run the economy adjusts back to potential GDP through flexible prices, so the long-run aggregate supply curve is vertical: the cycle fluctuates around full employment. Long-term productivity growth, not demand, determines potential GDP.
In practice
A recession as a detour, not a destination.
Where people slip
Long run is the operative phrase.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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