Chapter 23, Problem 15Q

To determine

If it is necessary for the government to pursue discretionary policy in order to eliminate unemployment due to the slow process of self-correcting mechanism in the economy.

Introduction:

Self-correcting mechanism is system by which economy reaches to a stable point with no rigid prices or lower wage rates. It works with the self-correcting nature of demand and supply in the economy.

Self-correcting demand and supply is a process in which the demand and supply gaps are covered by the economy automatically because the demand of a good pressurises its supply to increase or excessive supply pressurises its demand to rise.

Discretionary policy refers to an economic policy as per which the government of a country has to put various changes in the economic factors such as spending, wages in order to stabilise the economy before its automatic correction.

Demand pull inflation is a type of inflation which arises due to increase in the demand of goods and services far above the level of their supply.