In the basic AD/AS macro model, permanent increases in real GDP are possible only if
A)the economy's automatic stabilizers are allowed to operate.
B)potential output is increasing.
C)the correct fiscal policy is implemented.
D)aggregate demand responds positively to demand shocks.
E)the aggregate supply curve is vertical.

Question

Quizplus · Accepted Answer

Based on the basic AD/AS macro model, permanent increases in real GDP are only possible if potential output increases. This means that there is an increase in the economy's ability to produce goods and services in the long run, which shifts the long-run aggregate supply (LRAS) curve to the right. This can happen due to factors such as improvements in technology, increases in the quantity and quality of inputs, and better institutional arrangements. Therefore, options A, C, D, and E are incorrect because they do not address the fundamental issue of potential output. Additionally, automatic stabilizers can help stabilize the economy in the short run, but do not contribute to permanent increases in real GDP. Similarly, fiscal policy and aggregate demand shocks can have positive effects on GDP, but only in the short run.

In the Basic AD/AS Macro Model, Permanent Increases in Real