A report from the Congressional Budget Office (CBO) noted, Real potential GDP is the maximum sustainable output
Question:
A report from the Congressional Budget Office (CBO) noted, “Real potential GDP is the maximum sustainable output of the economy, adjusted to remove the effects of inflation.” In 2018, real GDP was $18.6 trillion, and the CBO’s estimate of potential GDP was $18.5 trillion. In early 2019, the CBO forecast that in 2020 real GDP would be $19.4 trillion and potential GDP would be $19.3 trillion.
a. Why does the CBO include the word sustainable in its definition of potential GDP?
b. Draw an aggregate demand and aggregate supply graph to illustrate the macroeconomic situation in 2018 and in 2020. (You do not have to show on your graph the situation in 2019.) Be sure that your graph contains LRAS curves for 2018 and 2020, SRAS curves for 2018 and 2020, and AD curves for 2018 and 2020; also make sure it shows equilibrium real GDP and the price levels for both years.
Step by Step Answer:
A Glimpse into the US Economy From 2018 to 2020 Imagine a bustling marketplace where businesses churn out goods and services supply and consumers eagerly spend their money demand The US economy in 201...View the full answer
