When we study the adjustment process in macroeconomics,what assumption are we making about potential output,Y*?
A)Potential output is adjusting to changes in factor prices.
B)Potential output is adjusting to changes in factor supplies.
C)Potential output is adjusting to changes in technology.
D)Potential output is constant.
E)Potential output is not relevant to the analysis of the adjustment process.

Question

Quizplus · Accepted Answer

When we study the adjustment process in macroeconomics, we assume that potential output (Y*) is constant. This means that it is independent of changes in factor prices, factor supplies, or technology. The adjustment process focuses on how actual output (Y) responds to changes in aggregate demand or supply, and how this affects the economy's utilization of its resources. By assuming that potential output is constant, we can better understand the short-run fluctuations in output and employment that occur due to changes in aggregate demand or supply.

When We Study the Adjustment Process in Macroeconomics,what Assumption Are