Fluctuations in long run real output:
Recessionary Gap in output
Inflationary Gap in output
Increase in the prices of factors of production (like labour and raw materials) and reduction in real output to full employment levels but at higher price level (as discussed above) could sometimes lead to a situation called stagflation, i.e. stagnant economy with inflation. Decrease in the costs of factors of production could return the economy to initial full employment level and prices. The government can reduce the prices of raw materials by reducing the duties and taxes on them or auctioning more sources of the raw materials to producers. The cost of labour can be reduced by improvements in technology which will reduce the need for labour thus reducing their cost.