An economy is in long-run equilibrium when output equals potential output. Why is there no long-run equilibrium rate of "potential inflation"?
What will be an ideal response?
Potential output is a real variable determined by the economy's productive resources. When output deviates from potential, the temporary tightening or loosening in labor and other input markets causes upward or downward pressure on prices. Barring inflationary or deflationary spirals, changes in inflation cause output to approach potential output. Changes in output do not cause inflation to remain near or to approach any particular rate. On the contrary, inflation will be driven continually higher or lower as long as an output gap persists, and the economy may reach potential output and stable inflation at any inflation rate.
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