If ever real GDP is above potential real GDP, the inflation adjustment line (IA) must shift downward.

Question

Quizplus · Accepted Answer

The inflation adjustment line (IA) shifting downward or upward is not directly determined by the real GDP being above or below its potential level. Instead, the IA line represents the relationship between inflation and unemployment (or output gap), and shifts due to changes in inflation expectations, supply shocks, or changes in the natural rate of unemployment, not directly due to the level of real GDP relative to its potential.

If Ever Real GDP Is Above Potential Real GDP, the Inflation