If potential output exceeds actual output, the aggregate demand curve shifts downward over time.

Question

Quizplus · Accepted Answer

When potential output exceeds actual output, it typically indicates an output gap where the economy is not producing at its full capacity. This situation does not directly cause the aggregate demand curve to shift downward. Instead, it may prompt policy responses aimed at increasing aggregate demand to close the gap.

If Potential Output Exceeds Actual Output, the Aggregate Demand Curve