Which term represents the maximum sustainable level of real GDP?

Which term represents the maximum sustainable level of real GDP?

• A. Actual GDP.
• B. Cyclical GDP.
• C. Potential output.
• D. Discounted GDP.

Answer: (C)

The concept being tested is the economy’s long-run production capacity—the maximum real GDP that can be sustained over time given the available resources, technology, and institutions. This level, called potential output, reflects full use of resources without triggering rising inflation. Potential output is determined by the supply side: how many workers and how much capital the economy has, plus technology and how efficiently things are organized. It represents the economy’s sustainable path, not what happens because of short-run demand swings. In the short run, actual GDP can be above or below this level. When actual GDP exceeds potential, inflationary pressures tend to build as demand outpaces the economy’s capacity. When it’s below potential, unemployment rises and inflation tends to ease. Other terms describe different ideas: actual GDP is just what’s produced right now; cyclical GDP measures deviations caused by the business cycle; discounted GDP isn’t a standard macro measure for this concept.

The concept being tested is the economy’s long-run production capacity—the maximum real GDP that can be sustained over time given the available resources, technology, and institutions. This level, called potential output, reflects full use of resources without triggering rising inflation.

Potential output is determined by the supply side: how many workers and how much capital the economy has, plus technology and how efficiently things are organized. It represents the economy’s sustainable path, not what happens because of short-run demand swings. In the short run, actual GDP can be above or below this level. When actual GDP exceeds potential, inflationary pressures tend to build as demand outpaces the economy’s capacity. When it’s below potential, unemployment rises and inflation tends to ease.

Other terms describe different ideas: actual GDP is just what’s produced right now; cyclical GDP measures deviations caused by the business cycle; discounted GDP isn’t a standard macro measure for this concept.