The potential output line is vertical:
A) because the rate of inflation is steady in the long run.
B) because resource prices eventually catch up with product prices.
C) because product prices always increase at a faster rate than resource prices.
D) only when the money supply increases at the same rate as real GDP.

Question

Quizplus · Accepted Answer

The potential output line is vertical because it represents the maximum sustainable output of an economy, assuming full utilization of its resources. Over time, resource prices adjust to match product prices, reflecting the economy's capacity constraints, which is why the potential output does not depend on the level of prices in the economy.

The Potential Output Line Is Vertical