Briefly define real and potential GDP, and explain the relationship between real GDP and potential GDP. How can we measure potential GDP?
What will be an ideal response?
Real GDP is the actual level of GDP, adjusted for inflation. Potential GDP is what the GDP would be if the economy was fully employed. Because of the business cycle, real GDP fluctuates around potential GDP. Thus real GDP is sometimes greater than potential GDP, sometimes smaller than potential GDP, and sometimes equal to potential GDP. Over time, the larger-than-normal and smaller-than-normal values cancel out and we can estimate potential GDP by using the average of real GDP.
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The aggregate-demand curve shows the quantity of goods and services that firms choose to produce and sell at each price level.
a. true b. false
A monopolistically competitive firm in the long run ________
A) is inefficient because it makes zero economic profit B) produces a profit-maximizing amount of output that is less than capacity output C) is efficient because it makes zero economic profit D) sets its price equal to its marginal cost