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 ...
Economic Instability and Macroeconomic Policy
Economic instability and macroeconomic policy