Final answer:
Actual output can temporarily exceed its potential output, reflecting an inflationary gap, but this is not sustainable due to supply-side limits. Thus, the correct answer is A. can only temporarily exceed.
Step-by-step explanation:
When analyzing a country's output in relation to its potential output, it's important to consider that the actual output can fluctuate based on various economic conditions. According to Keynesian economic theory, particularly when discussing the Keynesian cross diagram, we see that actual output, represented as real GDP (Y), can temporarily exceed potential output during short periods. This situation demonstrates what is known as an inflationary gap, where the aggregate expenditure is greater than the economy's output at potential GDP.
However, this does not imply that the economy can sustain levels of output beyond its potential indefinitely. There are supply-side limits dictated by the availability of labor, machinery, technology, and market institutions. Thus, over time, the actual output cannot continuously exceed potential output without leading to issues such as unsold inventories piling up if the output exceeds aggregate expenditure, or shortages if spending exceeds output. Furthermore, when an economy is operating at its potential GDP, it is generally experiencing full employment, where machines and factories are running at capacity.
In conclusion, while brief periods where actual output surpasses potential output can occur, these periods are not sustainable. So, the correct option that aligns with this explanation is A. can only temporarily exceed.