In the study of short-run fluctuations in national income,potential income (output)is usually assumed to be
A)falling at its average growth rate.
B)moving together with potential output in neighbouring countries.
C)constant.
D)equal to actual income.
E)irrelevant,as the economy is rarely there.

Question

Quizplus · Accepted Answer

In the short-run analysis, potential output is assumed to be constant as it represents the economy's productive capacity when all resources, such as labor and capital, are fully employed. Short-run fluctuations are caused by changes in actual output from potential output due to factors such as changes in government policies or shifts in consumer and business confidence. Hence, potential output is assumed to be constant, and the focus is on understanding the causes of short-run fluctuations.

In the Study of Short-Run Fluctuations in National Income,potential Income