When the economy operates at potential GDP,

Question

Quizplus · Accepted Answer

When the economy operates at potential GDP, unemployment is at the natural rate, indicating that the economy is not experiencing cyclical unemployment and is at a sustainable level of employment. Additionally, the equilibrium real wage and employment level in the labor market have been reached, meaning supply and demand in the labor market are balanced without excesses or shortages. This does not necessarily mean the labor market is overheated, which would imply an unsustainable level of demand for labor leading to rising wages and potentially inflationary pressures.

When the Economy Operates at Potential GDP