The level of potential GDP
A) determines the location of the long-run aggregate supply curve.
B) rises and falls with the business cycle.
C) increases when the inflation rate rises.
D) changes when cyclical unemployment changes.

Question

Quizplus · Accepted Answer

The level of potential GDP represents the maximum sustainable output that can be produced in an economy in the long run, given its available resources and technology. Thus, it determines the location of the long-run aggregate supply (LRAS) curve, which represents the potential output of an economy in the long run. Movements in the business cycle or changes in inflation rates or cyclical unemployment can affect the actual output of an economy in the short run, but they do not affect the level of potential GDP.

The Level of Potential GDP