With an aid of AS-AD diagram, explain the effect on price level and output when the labour productivity increases in the long run

When labour productivity increases, the long run aggregate supply increases. The price level will decrease and the output level will increase in the short run.

The deflationary gap will result in a downward pressure on the input prices. In the long run, wages will adjust downward and the SRAS will increase accordingly. The price level will decrease and the output will remain unchanged.