Suppose that potential output is $6 trillion and real GDP is currently $5.5 trillion. In the long run, we would expect that:
A) wages and input prices will fall.
B) the price level will rise.
C) real GDP will fall.
D) all of the above

Question

Quizplus · Accepted Answer

In the long run, we expect that wages and input prices will fall to meet the potential output level of $6 trillion. This will result in a decrease in the cost of production, allowing firms to increase output and possibly lower prices as well. Therefore, choice A is the correct answer. The price level may or may not rise depending on other factors such as changes in aggregate demand and supply, but this is not necessarily a direct consequence of the gap between real GDP and potential output. Real GDP falling is also not expected in the long run as the economy adjusts to reach its potential output level.

Suppose That Potential Output Is $6 Trillion and Real GDP