The level of potential GDP
A) increases when the inflation rate rises.
B) rises and falls with the business cycle.
C) determines the location of the long-run aggregate supply curve.
D) changes when cyclical unemployment changes.

Question

Quizplus · Accepted Answer

The level of potential GDP determines the maximum amount of output that can be produced by an economy in the long run, given its resources and technology. It is not affected by short-term fluctuations in the business cycle or changes in the inflation rate or cyclical unemployment. The location of the long-run aggregate supply curve depends on the level of potential GDP, which reflects the economy's productive capacity.

The Level of Potential GDP