An increase in aggregate demand will have the following effect on potential output:
A)Potential output will increase
B)Potential output will decrease
C)Potential output will increase at first and then decrease
D)There won't be a change in potential output from an increase in aggregate demand

Question

Quizplus · Accepted Answer

Potential output is determined by the economy's supply-side factors such as labor force, capital, technology, and natural resources. An increase in aggregate demand can lead to temporary increases in output above the economy's potential level but it will not raise the economy's underlying potential output. Therefore, there won't be a change in potential output from an increase in aggregate demand.

An Increase in Aggregate Demand Will Have the Following Effect