Everything else is held constant, when output is below the natural rate level, wages will begin to fall and increase short.
The difference between an economy's actual and prospective output is quantified by the term "output gap" in economics. When an economy is operating at maximum efficiency, or when it is at capacity, potential output refers to the total amount of products and services it can produce.
The productive capacity of the economy is frequently used interchangeably with potential output.
A positive gap develops in a boom when output exceeds its potential level. It is common to refer to the economy in this situation as "overheating," which pushes inflation higher and may force the central bank to "cool" the economy by increasing interest rates.
When the output is below the natural rate level, wages start to decline and increase too slowly, all other things being equal.
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