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QUESTION 3 Which of the following statements is not true? Potential GDP could increase or decrease over a period of time. Alt

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Answer #1

Correct Answer:

C

Explanation:

Theory of economic growth explains the growth rate of real GDP over a period of time unless it reaches the potential GDP level. So, alternative C is right as the statement is not true.

Alternative A is true, because potential GDP increases with technological advancements and decreases due to destruction of resources. Alternative B is true, because an economy can face inflationary gap, but it will come back to the potential GDP level. Alternative D is true, because different stages of the business cycle cause real GDP to increase and or decrease depending upon the stage of the business cycle. Alternative E is true, because potential GDP is the full employment GDP and it is sustainable.

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