Potential GDP is defined as the level of aggregate output at which
A)there is only cyclical and frictional unemployment, and capital equipment is being used at 100 percent capacity.
B)all factors of production are employed at their "normal" utilization rates.
C)the unemployment rate is zero.
D)there is only cyclical and structural unemployment.
E)all factors of production are employed at 100 percent capacity.

Question

Quizplus · Accepted Answer

Potential GDP is defined as the level of aggregate output at which all factors of production are employed at their "normal" utilization rates. This means that there is no cyclical or structural unemployment, and capital equipment is being used at a rate that is considered to be sustainable in the long run. However, it does not require that all factors of production be utilized at 100 percent capacity, as this may not be sustainable or even desirable in the long run.

Potential GDP Is Defined as the Level of Aggregate Output