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Potential GDP is a specific economic term. What does it mean?
AMaximum output at full employment of labor and capital
BThe GDP level reached only during a recession
CThe value of imports minus exports each year
DThe GDP forecast issued each quarter by banks
Answer & Solution
Correct answer: A. Maximum output at full employment of labor and capital
1. Potential GDP describes a ceiling on sustainable output, not any single year's actual output.
2. It is set by how much the economy could produce if labor, capital, and technology were all fully employed.
3. This maximum is also called full-employment GDP.
4. It has nothing to do with the trade balance or private forecasts, which rules out options C and D.
_Source: OpenStax Principles of Macroeconomics for AP Courses (CC BY 4.0), Ch 10 "The Aggregate Demand/Aggregate Supply Model", section 10.2 | Building a Model of Aggregate Demand and Aggregate Supply_
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