In the AD/AS model, the potential output line:
A) shows short-run equilibrium price and real output.
B) provides a benchmark for evaluating the economy's short-run performance.
C) is upward-sloping to show higher potential output means higher prices.
D) shifts to the right when AD increases.

Question

Quizplus · Accepted Answer

The potential output line in the AD/AS (Aggregate Demand/Aggregate Supply) model represents the level of output that an economy can produce at a constant inflation rate, serving as a benchmark for evaluating how well the economy is doing in the short run. It does not directly show equilibrium prices or output levels, nor does it slope upwards with higher prices indicating higher output. Additionally, shifts in the potential output line are typically due to changes in factors like technology or labor force size, not shifts in AD.

In the AD/AS Model, the Potential Output Line