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The AD-AS analytical framework is devised to analyse how the economy adjusts to short-run disturbances and restore full potential output. Suppose that the economy is
The AD-AS analytical framework is devised to analyse how the economy adjusts to short-run disturbances and restore full potential output. Suppose that the economy is in a short-run equilibrium state with a recessionary gap. Using relevant diagrams, explain the classical argument that the economy will self-adjust to restore full employment and the Keynesian counter-argument that self-regulation may not work. (25 marks)
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