In the short run, output deviates from potential output from "summary" of Principles of Macroeconomics by N. Gregory Mankiw
In the short run, the level of output in an economy may not always align with its potential output. Potential output refers to the maximum level of output that an economy can sustain over the long term when all resources are fully utilized. However, in reality, various factors can cause deviations from this potential level of output in the short run. One key factor that can lead to output deviating from potential output in the short run is fluctuations in aggregate demand. Aggregate demand refers to the total demand for goods and services in an economy at a given price level. Changes in consumer spending, investment, government expenditures, and net exports can all affect aggregate demand and, consequently, output levels in the short run. Another factor that can cause output to deviate from potential output in the short run is supply-side shocks. Supply-side shocks are unexpected events that disrupt the production process and can lead to temporary decreases or increases in output. For example, a natural disaster that damages key infrastructure or a sudden increase in oil prices can negatively impact output levels in the short run. Monetary and fiscal policy actions can also influence output levels in the short run. Central banks can adjust interest rates and implement other monetary policies to stimulate or cool down economic activity. Similarly, governments can use fiscal policy measures such as changes in taxes and government spending to influence aggregate demand and output levels in the short run.- Deviations from potential output in the short run are a common occurrence in economies due to various factors such as fluctuations in aggregate demand, supply-side shocks, and policy actions. Understanding these factors and their implications is essential for policymakers and economists to effectively manage economic fluctuations and promote long-term economic growth.
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