An increase in aggregate demand will have the following effect on potential output:
A) potential output will increase.
B) potential output will decrease.
C) potential output will increase at first and then decrease.
D) there won't be a change in potential output from an increase in aggregate demand.

Question

Quizplus · Accepted Answer

An increase in aggregate demand does not affect potential output, which is determined by the economy's capacity to produce goods and services based on its resources, technology, and institutions. Potential output can only be increased in the long run by improving factors such as productivity, education, and innovation. However, an increase in aggregate demand can cause an increase in actual output in the short run due to the utilization of idle resources and capacity, but it may also lead to inflationary pressures if resources become scarce or inefficiently allocated.

An Increase in Aggregate Demand Will Have the Following Effect