A key assumption of the theory of economic fluctuations is that real GDP fluctuates around potential GDP.

Question

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The theory of economic fluctuations assumes that real GDP fluctuates around potential GDP, which is the level of output that the economy can produce at full employment and without inflationary pressures. This means that when real GDP is below potential GDP, there is a recessionary gap, and when real GDP is above potential GDP, there is an inflationary gap.

A Key Assumption of the Theory of Economic Fluctuations Is