"The level of potential output,Y*,acts like an anchor for the level of real GDP." Which of the following best explains this statement?
A)Following an AD or AS shock that pushes real GDP away from Y*,the adjustment of factor prices brings real GDP back to Y*.
B)The level of potential output,Y*,is equal to whatever the level of actual GDP,no matter what shocks hit the economy.
C)Real GDP is "anchored" to potential output,Y*,because real GDP is,by definition,always equal to Y*.
D)Following an AD or AS shock that pushes real GDP away from Y*,changing technology brings Y* back to real GDP.
E)The concept of potential output,Y*,as an anchor for real GDP refers to the fiscal policy tools used to bring real GDP back to Y*.

Question

Quizplus · Accepted Answer

The statement suggests that following an AD or AS shock, there is a tendency for real GDP to revert back to the level of potential output (Y*). This is because the adjustment of factor prices, such as wages and interest rates, helps to bring the economy back to its potential output level. Option A best explains this concept.

"The Level of Potential Output,Y*,acts Like an Anchor for the Level