Assume the self-correcting economy's criteria

Assume the self-correcting economy's criteria, and predict the possible consequences of rent decrease in the economy's real GDP and the price level. Why would leaving the economy to self-correction not a good idea in some instances.

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Expert Solution arrow_forward Step 1

If rent decreases, then the income of land owners will decrease as a result. Hence, national income which is the sum total of incomes earned by all the nationals of an economy, either residing within the country or abroad, will also reduce.

By income method, national income is given by-

Rent + wages + interest + profit + NFIA

(NFIA = net factor income earned from abroad)

If rent falls everything else remaining unchanged, then national income should fall.

 

arrow_forward Step 2

If aggregate income falls, then this should reduce aggregate demand as well because people would have less income with which to purchase goods and services. This in turn would lead to a decline in the price level.

Now real GDP = nominal GDP/price level

If the price level reduces nominal GDP remaining unchanged, then real GDP would rise.

arrow_forward Step 3

Leaving the economy to self-correction is not a good idea always because sometimes this may result in market failure. Market failure is said to occur when an economy left on its own fails to allocate scarce resources efficiently. This can happen in the case of provision of public goods, in case of common property resources, in case of imperfect competition or in case of goods generating externalities either in its production or consumption. In case of such goods, private producers are inefficient in their production and distribution, and hence government intervention becomes necessary.

arrow_forward Step 4

Government also has to intervene in order to redistribute income from the rich to the poor for reducing the degree of income inequality in the economy. Apart from these, maintenance of law and order, framing of laws, policies and regulations all constitute the task of the government. If the economy is left to self-correction, then market prices may sometimes reach to extremely high or very low levels, thus disadvantaging either producers or consumers. In such situations, government has to intervene.

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来源： https://www.cnblogs.com/coursehero/p/16124836.html