The level of potential GDP
A) increases as the real rate of interest decreases.
B) increases as the real rate of interest increases.
C) is unaffected by the real rate of interest.
D) is represented on the IS-MP model by a horizontal line at the world real rate of interest.

Question

Quizplus · Accepted Answer

The level of potential GDP is not affected by the real rate of interest. Potential GDP is determined by factors such as labor force participation, productivity, and technology, which are independent of the interest rate. The interest rate affects the actual level of output and employment but not the potential level. Therefore, the IS-MP model would not include a line representing potential GDP.

The Level of Potential GDP