Question

Real GDP can never be greater than potential GDP.

a. True
b. False

Answer 1

True

Real GDP can be greater than potential GDP, indicating an economy might be operating above its sustainable level, which can lead to inflation.

Step-by-step explanation:

Real GDP can, in fact, be greater than potential GDP, although this situation is typically not sustainable in the long run.

Potential GDP is the level of output that an economy can sustain over the long run without increasing inflation, when all resources are fully employed. Real GDP is the actual output of an economy at a given time.

When real GDP exceeds potential GDP, it suggests the economy is operating above its efficient capacity, possibly in an overheating state which can lead to inflationary pressures.