Full-employment equilibrium occurs when
A) real GDP exceeds potential GDP.
B) real GDP equals potential GDP.
C) potential GDP exceeds real GDP.
D) a result of an increase in long-run aggregate supply.

Question

Quizplus · Accepted Answer

Full-employment equilibrium occurs when real GDP equals potential GDP. This means that the economy is utilizing all of its resources, including labor, capital, and technology, at their maximum sustainable levels. It is also known as the natural level of output or long-run equilibrium. When real GDP exceeds potential GDP, there is inflationary pressure in the economy due to excess demand, and when potential GDP exceeds real GDP, there is unemployment due to insufficient demand. An increase in long-run aggregate supply can contribute to achieving full-employment equilibrium by increasing potential GDP.

Full-Employment Equilibrium Occurs When