In the short- run, real GDP can be greater than or less than potential GDP because in the short run the
A) full- employment level of employment is fixed.
B) money wage rate is fixed.
C) price level is fixed.
D) quantity of capital is fixed.

Question

Quizplus · Accepted Answer

In the short run, the money wage rate is often fixed due to employment contracts or other agreements. This means firms can produce more output at the current wage without incurring additional labor costs, leading to an increase in real GDP. On the other hand, if the money wage rate is sticky downwards and there is a decrease in aggregate demand, firms may not be able to adjust wages quickly enough, leading to a decrease in real GDP below potential GDP. The other options (A, C, and D) suggest fixed factors of production, but in reality, these factors can adjust in the long run, allowing the economy to reach potential GDP in the long run.

In the Short- Run, Real GDP Can Be Greater Than