When Output Deviates from the Natural Level of Output, the Economy

Essay

When output deviates from the natural level of output, the economy is believed to "self- correct" over time. That is, the economy will return to the natural level of output without any policy intervention. First, explain how this process works when output is below the natural level of output. Second, briefly discuss what factors would hinder this self- correcting adjustment when the economy is in a liquidity trap.