What is the effect of an increase in potential output on-00412
This subjective question is related to the book/course
vu cs201 Introduction to Programming.
It can also be found in
vu cs201 Mid Term Solved Past Paper No. 10.
Question 1: What is the effect of an increase in potential output on inflation and output?
Answer:
Increase in potential output shifts long run aggregate supply curve to right, this shift has no impact on short run aggregate supply curve so inflation and output remains unchanged. But in long run now as potential output is increased so current output will be below potential output creating recessionary output gap causing inflation to fall and output begins to rise.
