Potential output is the level of real GDP that:
A) occurs when the economy has only cyclical unemployment.
B) the economy would produce if all prices, including nominal wages, were fully flexible.
C) occurs when the actual rate of unemployment is zero.
D) the economy would produce if all prices, including nominal wages, were sticky.

Question

Quizplus · Accepted Answer

Potential output is the level of real GDP that an economy would produce if all prices, including nominal wages, were fully flexible. In other words, it represents the maximum amount of output an economy can produce given its resources and technology. It is not affected by cyclical unemployment or the actual rate of unemployment, but rather by the long-run capacity of the economy to produce goods and services.

Potential Output Is the Level of Real GDP That