Question

6.7 When the economy is at its potential GDP level, do you think there is a role for fiscal policy? Why or why not?

Answer 1

Potential GDP level: The level at which the country can produce output provided all its workforce is employed.

Actual GDP: The actual output the economy is producing with the given workforce.

Potential GDP is usually not similar to actual GDP. An economy is always approaching the potential GDP. In the long run the actual GDP is closer to the potential GDP however in the short run the GDP is always increasing or decreasing never really fully reaching its potential GDP.

Thus we require adjustments in the short run in the form of a fiscal or monetary policy to expand or decrease the economy's output.

However, as mentioned in the question if we are at potential GDP no further adjustment would be required. Its needs to be noted though that an economy in reality is never at its potential GDP.