How does an increase in aggregate supply during economic recovery impact real interest rates and inflationary expectations?

When there is an increase in aggregate supply during an economic recovery, it means that businesses are producing more goods and services. This increase often leads to lower prices because there is more available for people to buy, which helps reduce inflationary expectations. As prices stabilize or fall, people and businesses feel more confident about the economy, which can also lead to lower real interest rates. For example, if a country starts producing more cars, the price of cars might drop, making it cheaper for people to buy them. In turn, lower prices can encourage spending and investment, further boosting the economy.