1. What determines potential output Yf, and how can the economy exceed Yf in the short...

1. What determines potential output Yf, and how can the economy exceed Yf in the short run?

Expert Solution

Potential output determine when economy produces by using all its resources. These resources are technology, natural resources, labour and equipment. In other words we can say that the economy attain the potential output when unemployment level is equal to natural rate of unemployment.

When economy output is more than potential output it is known as positive output gap. It happens in short run when aggregate Demand is more than aggregate supply. So when aggregate Demand is more than aggregate supply the economic growth is unsustainable and create inflationary pressure.

Rahul Sunny answered 2 years ago

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