The relationship between real GDP and potential GDP over the business cycle can be best summarised by which of the following statements?
A) Real GDP cannot be greater than potential GDP.
B) Real GDP cannot be less than potential GDP.
C) Real GDP cannot be equal to potential GDP.
D) Real GDP is always equal to potential GDP.
E) Real GDP fluctuates around potential GDP.

Question

Quizplus · Accepted Answer

Real GDP fluctuates around potential GDP over the business cycle, sometimes being above it during economic expansions and below it during recessions. Potential GDP represents the maximum sustainable output of an economy, and real GDP measures actual output, which can vary due to changes in demand, supply shocks, and other economic factors.

The Relationship Between Real GDP and Potential GDP Over the Business