Figure 1. 900 Long-Run 800 AS Short-Run 700 AS G00 S00 400 300 AD 200 100 300 400 50 G00 700 00 100 200 Real GDP In the economy depicted in Figure 1 twhat is the value of Potential Real GDP? How do you know? (Note: for full credit you must not only provide a number but also an explanation.)
Answer the attached question
Potential GDP is the output that an economy generates to be the highest level of the real gross domestic product maintained over the long-term. It is the output level that an economy produces or can produce at a constant rate of inflation. It is determined only by the long-run supply curve because the potential GDP cannot be attained in the short-run.
The value of potential real GDP from the figure is 500 when the LRAS (Long-Run Aggregate Supply) curve is drawn.
The real GDP in this figure is maintained at 400 as the output and 500 as the aggregate level of prices. The potential GDP is more than the real GDP, which shows that the economy is not operating at the full-employment level. The gap created is called the deflationary gap of the economy created because of more potential GDP than the real GDP.
The potential GDP is known as it takes place only in the long-run and can only be established at the graph's long-run aggregate supply curve. The potential GDP is considered as a benchmark of full-employment functioning. If the equilibrium in the short-run is away from this benchmark, then the economy faces either the deflationary gap or the inflationary gap.
Step by step
Solved in 3 steps
