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John Vahaly

In: 21st Century Economics: A Reference Handbook

Chapter 34: Economic Instability and Macroeconomic Policy

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Economic Instability and Macroeconomic Policy
Economic instability and macroeconomic policy

Macroeconomic instability and the business cycle are generally understood as changes in output or gross domestic product (GDP), unemployment, and inflation rates. The economy has a long-run growth path that is subject to short-term macro-economic demand and supply shocks that push GDP away from its long-run potential or trend growth rate. Smith and the classical tradition that followed believed a hands-off approach was the correct policy stabilization to pursue when such short-term output disturbances arose. This reflected classical emphasis on long-run growth as a supply process that was best left to private entrepreneurial activity. Furthermore, private market economies would automatically self-correct through appropriate wage and price adjustments. Recessions, characterized by “gluts” of commodities and workers, would ...

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