Question

Suppose the economy exhibits a large, unexpected increase in productivity growth that lasts for a decade. Policymakers are (quite reasonably) slow to learn what has happened to potential output and incorrectly interpret the increase in output as a boom that leads actual output to exceed potential. Suppose they adjust macroeconomic policy so that the mismeasured level of short-run output is zero.

(a) What happens to the true amount of short-run output Y?
(b) What happens to inflation over time?

Answer 1

W

Step-by-step explanation:

A. What will happen to the true amount of short-run output is that the real output will drop to a new lower level, this implies that recession will be accidentally created by policy markers.

B. There will be a fall in inflation.