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A positive demand shock like a technological improvement on invested products can cause an inflationary gap, a period of higher inflation and lower unemployment. When
A positive demand shock like a technological improvement on invested products can cause an inflationary gap, a period of higher inflation and lower unemployment. When this happens, AD shifts to the right. After the economy has moved to the right, the Federal Reserve to cover the gap can reduce inflation without having to worry about causing more unemployment.
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