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Basic Question 1 of 8

In the short run, real GDP ______ potential GDP.

A. is always above
B. can fall below or rise above
C. is always below

User Contributed Comments 6

User Comment
prachirp I don't understand how GDP can rise above potential GDP.How can u gor beyond potential?You can reach potential ,but beyond potential....????
javasun yes you can reach beyond potential but that cannot be sustained.
ambar You cam go beyond potential during expansion where more people will be required for job
wundac think of it this way potential gdp assume a 4 to 5% unemployment rate. In the short run we all know that unemployment can fall below that level (i.e expansion from ambar)
JepTang Real GDP can fluctuate around potential GDP. If it goes above then an inflationary gap is created. On the other hand, if it fluctuates below then a recessionary gap is created. In the long run, these inefficiencies should be corrected.
dmfcrowe Just look at developed economies right now. Expanded beyond potential primarily due to excess borrowing that was underpriced for the risk. Now suffering at under potential as excess leverage is reduced. Although being partially swallowed by governments at under valued prices again. Next step higher taxes to absorb this excess.
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Learning Outcome Statements

describe how fluctuations in aggregate demand and aggregate supply cause short-run changes in the economy and the business cycle;

distinguish among the following types of macroeconomic equilibria: long-run full employment, short-run recessionary gap, short-run inflationary gap, and short-run stagflation;

explain how a short run macroeconomic equilibrium may occur at a level above or below full employment;

analyze the effect of combined changes in aggregate supply and demand on the economy;

CFA® 2024 Level I Curriculum, Volume 2, Module 10.