In the short-run, real GDP can be greater than or less than potential GDP because in the short run the
A) money wage rate is fixed.
B) price level is fixed.
C) quantity of capital is fixed.
D) full-employment level of employment is fixed.

Question

Quizplus · Accepted Answer

In the short run, the money wage rate is typically fixed, meaning that labor costs do not adjust to changes in output levels. This allows for the possibility of firms to increase production and output beyond potential GDP without facing corresponding increases in labor costs, leading to short-run real GDP that exceeds potential GDP. Conversely, in the short run, a decrease in aggregate demand could lead to output levels falling below potential GDP. The other options (B, C, D) suggest fixed variables that would limit production levels rather than allow for variations beyond potential GDP in the short run.

In the Short-Run, Real GDP Can Be Greater Than or Less