Restore Full employment

Question

What is the economy’s own adjustment process that begins to restore full employment without government intervention? Do you expect that process to work slowly or rapidly? Why?

Answer 1

I don't think it will.  It would be very difficult to achieve full employment.  However I don't think full employment would be completely a good thing...it would make things worse in one way, there would be high inflation.

Answer 2

The adjustment process is fall in demand at high prices, leading to fall in aggregate demand, leading to fall in prices, leading to fall in investment, GDP, aggregate demand, rising in inventory and fall in production. This would lead to stagnant or falling wage rates. Once inventories go down with production falling continuously, at point the aggregate supply starts rising even as demand has fallen.  The demand supply ga emerges again,  price starts rising gradually and profits rise. Incomes rise, demand rises and so output once again.

This takes a long time. That is why Keynes suggested expansionary fiscal policy for govt. to raise effective demand as soon as the trends show weakening of aggregate demand.