Do business cycles self correct themselves?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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This is a matter of some controversy and there is no way in the modern world to know for sure.  We are not able to know whether business cycles will correct themselves (if recessions will end on theirn own) because no government is willing to let a recession continue without trying to do anything about it.

Classical economists argue that business cycles will self correct and the level of Real GDP will always return to its potential.  However, Keynesian economists argue that this will not happen if the recession is a very deep one (like the Great Depression or perhaps the "Great Recession" that started in 2007 or 2008).  These economists say governments will need to intervene to end the recession.

There is no way to know which school of thought is correct because we cannot do controlled experiments on the economies of entire nations.

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