Potential output is
A) the level of real GDP that exists when the economy is experiencing only cyclical and structural unemployment.
B) the level of real GDP that exists when the quantity of labor supplied is equal to the quantity of labor demanded.
C) the level of real GDP that exists when the actual rate of unemployment is zero.
D) the level of real GDP that exists when the economy is experiencing only frictional and cyclical unemployment.

Question

Quizplus · Accepted Answer

Potential output refers to the maximum level of real GDP that can be produced in an economy when the quantity of labor supplied is equal to the quantity of labor demanded, i.e. when there is no cyclical unemployment. It does not take into account structural or frictional unemployment, as those are inherent in any economy. Therefore, option B is the correct answer.

Potential Output Is