Suppose a rise in productivity increases potential output and creates a recessionary

Chapter 0, Problem 2

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QUESTION:

Suppose a rise in productivity increases potential output and creates a recessionary gap. Explain how the economy can self-correct in the long run.

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QUESTION:

Suppose a rise in productivity increases potential output and creates a recessionary gap. Explain how the economy can self-correct in the long run.

ANSWER:

Step 1 of 2

A recessionary gap is when the actual output is less than the potential or full employment level. The wages in the economy will fall due to this gap.

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