Question

Over the business cycle, a. only real GDP fluctuates around its trend and potential GDP remains equal to its trend. b. real GDP fluctuates around its trend. c. only potential GDP fluctuates around its trend and real GDP remains equal to its trend. d. neither real GDP nor potential GDP fluctuates because they just grow smoothly along their trends. e. potential GDP fluctuates around its trend.

Answer 1

b. real GDP fluctuates around its trend.

Step-by-step explanation:

Recall that the quantity of real GDP at full employment is potential GDP. Over the business cycle, real GDP fluctuates around potential GDP because the quantity of labor employed fluctuates around the full employment level. The aggregate supply-aggregate demand (AS-AD) model explains these fluctuations.