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Chapter 11: 26 (page 292)

What is potential GDP?

Short Answer

Expert verified

Potential GDP is at full employment, an economy can produce its maximum quantity of production.

Step by step solution

01

Concept introduction 

Gross Domestic Product is the market value of all final goods being produced and services being provided.

02

Explanation

Potential GDP attempts to estimate the optimum output level or the highest level of output an economy can achieve or sustain over time, rather than just representing the final market value of all commodities and services manufactured within the country's domestic border. The concept of potential GDP revolves around the concept of sustainability.

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Most popular questions from this chapter

Suppose concerns about the size of the federal budget deficit lead the U.S. Congress to cut all funding for research and development for ten years. Assuming this has an impact on technology growth, what does the AD/AS model predict would be the likely effect on equilibrium GDP and the price level?

The imaginary country of Harris Island has the aggregate supply and aggregate demand curves as Table 11.3 shows.

Price Level
AD
AS
100
700
200
120
600
325
140
500
500
160
400
570
180
300
620

a. Plot the AD/AS diagram. Identify the equilibrium. b. Would you expect unemployment in this economy to be relatively high or low?

c. Would you expect concern about inflation in this economy to be relatively high or low?

d. Imagine that consumers begin to lose confidence about the state of the economy, and so AD becomes lower by 275 at every price level. Identify the new aggregate equilibrium.

e. How will the shift in AD affect the original output, price level, and employment?

If the economy is operating in the Keynesian zone of the SRAS curve and aggregate demand falls, what is likely to happen to real GDP?

Suppose, after five years of sluggish growth, the European Union's economy picks up speed. What would be the likely impact on the U.S. trade balance, GDP, and employment?

Why would an economist choose either the neoclassical perspective or the Keynesian perspective, but not both?
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