If we cannot accurately measure potential GDP:
A) we might overestimate the severity of a recession
B) we may adopt the wrong fiscal or monetary policy
C) we will never know the true state of the economy
D) All of these answers are correct.
E) None of these answers are correct.

Question

Quizplus · Accepted Answer

If we cannot accurately measure potential GDP, we might overestimate the severity of a recession and respond with policy measures that are too drastic or unnecessary (B). Similarly, we might adopt the wrong fiscal or monetary policy, either overstimulating the economy or allowing it to contract unnecessarily (B). Given the importance of potential GDP as a benchmark for assessing economic growth, price stability, and overall welfare, not being able to measure it accurately impedes our ability to fully understand the true state of the economy and how to improve it (A and C). Therefore, all of these answers are correct (D).

If We Cannot Accurately Measure Potential GDP