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3-) a-) Please draw and analyze what will happen when actual output is higher than the...

3-)

a-) Please draw and analyze what will happen when actual output is higher than the potential output.

b-) Please draw and analyze what will happen when actual output is lower than the potential output.

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Answer #1

3a)

when actual output is greator than potential output then there will be a positive output gap '

actual gdp will be greator then potential some resources are used beyond their capacity (labour working over time )

which will lead to a demand-pull and cost-push inflationary pressures.

3b)when actual output is lower than potential output then there will be a negative output gap.

.In negative output gap actual GDP is less than potential GDP .Some factor of production are under-utilized.there might be a problem of higher unemployment and possible deflationary risk.

In the diagram AS=aggreagte supply

AD=aggregate demand

LAS=long run aggregate supply

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