Starting from a long-run equilibrium,an increase in potential output leads to _________ gap in the short run and to ________ rates of inflation in the long run.
A) an expansionary;higher
B) an expansionary;lower
C) no output;higher
D) a recessionary;higher
E) a recessionary;lower

Question

Quizplus · Accepted Answer

An increase in potential output creates a recessionary gap in the short run because actual output is below the new potential output. In the long run, as the economy adjusts, inflation rates tend to decrease due to the increased capacity and supply.

Starting from a Long-Run Equilibrium,an Increase in Potential Output Leads