Potential output is:Question 20Select one:a.the level of real GDP that exists when the economy is experiencing only cyclical and structural unemployment.b.the level of real GDP that exists when the quantity of labor supplied is equal to the quantity of labor demanded.c.the level of real GDP that exists when the actual rate of unemployment is zero.d.the level of real GDP that exists when the economy is experiencing only frictional and cyclical unemployment.
Question
Potential output is:Question 20Select one:a.the level of real GDP that exists when the economy is experiencing only cyclical and structural unemployment.b.the level of real GDP that exists when the quantity of labor supplied is equal to the quantity of labor demanded.c.the level of real GDP that exists when the actual rate of unemployment is zero.d.the level of real GDP that exists when the economy is experiencing only frictional and cyclical unemployment.
Solution
The potential output refers to the highest level of economic output an economy can sustain over a period of time without causing inflation. It is the level of real GDP that the economy could produce if it were fully employing its available resources.
So, let's analyze the options:
a. The level of real GDP that exists when the economy is experiencing only cyclical and structural unemployment. This option is incorrect because potential output is achieved when the economy is at full employment, not when it is experiencing unemployment.
b. The level of real GDP that exists when the quantity of labor supplied is equal to the quantity of labor demanded. This option is correct. When the quantity of labor supplied equals the quantity of labor demanded, the economy is at full employment, and it is producing its potential output.
c. The level of real GDP that exists when the actual rate of unemployment is zero. This option is incorrect. Even at potential output, there is always some level of unemployment in the economy due to factors like frictional unemployment (people in between jobs) and structural unemployment (people who lack the skills needed for available jobs).
d. The level of real GDP that exists when the economy is experiencing only frictional and cyclical unemployment. This option is incorrect. Cyclical unemployment occurs when there is a downturn in the economy, which is not a condition of potential output.
So, the correct answer is b. The level of real GDP that exists when the quantity of labor supplied is equal to the quantity of labor demanded.
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