Final answer:
Potential GDP or full-employment GDP represents the maximum quantity of goods and services that an economy can produce given full employment of its existing factors of production. It is determined by the supply side of the economy and is not solely determined by demand.
Step-by-step explanation:
In macroeconomics, the maximum output that an economy can sustain over a period of time is called potential GDP or full-employment GDP. It represents the maximum quantity of goods and services that an economy can produce given full employment of its existing factors of production, such as labor, physical capital, technology, and institutions.
When an economy is operating at its potential GDP, machines and factories are running at capacity, and the unemployment rate is relatively low. It is important to note that potential GDP is determined by the supply side of the economy and is not solely determined by demand.
For example, even if there is high demand for goods and services, the economy may not be able to produce more if the factors of production are already fully employed.