Question

Actual real GDP will be above potential GDP if

A)firms are producing at capacity.
B)Inflation is rising.
C)firms are producing above capacity.
D)firms are producing below capacity.

Answer 1

Actual real GDP is above potential GDP when firms are producing above their capacity. Such conditions often create inflationary pressures.

Step-by-step explanation:

Actual real GDP will be above potential GDP if firms are producing above capacity. Potential GDP represents an economy's maximum sustainable output without triggering inflation, given its current technology and resource availability. When firms push their production limits beyond this capacity, actual GDP surpasses the potential GDP, which can often lead to inflationary pressures. This concept is highlighted during economic upswings, such as those in the late 1990s, when actual GDP rose above potential GDP for a period. Conversely, during recessions like those in 1980, 1991, 2001, and 2008-2009, actual GDP fell below potential GDP. Short-term fluctuations notwithstanding, the long-term trend of potential GDP is a determinant of the economy's size.