Final answer:
According to the self-correction view held by neoclassical economists, the economy is contracting during a recession, but will self-correct as prices and wages adjust, restoring the economy to its potential GDP.
Step-by-step explanation:
The self-correction view in economics is the belief that in a recession, the economy could be contracting. This view, held by neoclassical economists, suggests that during a recession, economic output or real Gross Domestic Product (GDP) decreases, and this downturn is self-correcting over time without government intervention. This occurs because prices and wages will adjust to restore the economy to its potential GDP. Thus, the focus for neoclassicals is on how to promote the growth of potential GDP, which depends on the growth rate of long-term productivity.
When the economy experiences a recession, it is often below its potential output, and unemployment typically increases. Government actions such as expansionary fiscal policy can be used to alleviate the effects of the recession. This approach involves increasing government spending, decreasing taxes, or both to boost aggregate demand. However, neoclassical economists might argue that the market will self-correct, while others, such as Keynesians, advocate for active fiscal policy to manage economic fluctuations.