In the aggregate expenditures model, the equilibrium GDP is:
A) Assumed to be equal to the potential GDP level
B) Not necessarily equal to the full-employment GDP
C) Always above the potential GDP level
D) Always less than the full-employment GDP level

Question

Quizplus · Accepted Answer

The equilibrium GDP in the aggregate expenditures model may be equal to or below the potential GDP level, but it is not necessarily equal to the full-employment GDP level. This is because there can be a gap between the actual level of output and the economy's full potential due to factors such as cyclical unemployment or underutilization of resources. Therefore, the equilibrium GDP can fall short of the full-employment level even when it is at its highest possible level.

In the Aggregate Expenditures Model, the Equilibrium GDP Is