The three figures below show the phases of a disinflation. In part i), the economy is experiencing a sustained inflation at E 1.
FIGURE 29-4
-Refer to Figure 29-4, part iii). Consider the recovery phase of the disinflation process when output is returning from Y3 to Y*. Real GDP can return to potential either by , or by .

Question

The three figures below show the phases of a disinflation. In part i), the economy is experiencing a sustained inflation at E 1.
  FIGURE 29-4
-Refer to Figure 29-4, part iii). Consider the recovery phase of the disinflation process when output is returning from Y3 to Y*. Real GDP can return to potential either by , or by .

Quizplus · Accepted Answer

The recovery phase can occur if the AS curve falls back to AS2, indicating a reduction in costs or prices, or if there is a monetary expansion that shifts the AD curve to AD2, increasing demand and output.

The Three Figures Below Show the Phases of a Disinflation