The relationship between real GDP and potential GDP over the business cycle can be best summarized by which of the following statements? A. Real GDP cannot be equal to potential GDP. B. Real GDP cannot be greater than potential GDP. C. Real GDP is always equal to potential GDP. D. Real GDP fluctuates around potential GDP. E. Real GDP cannot be less than potential GDP.

D. Real GDP fluctuates around potential GDP.

Explanation:

Sometimes Real GDP will be HIGHER than Potential GDP. This would mean that they Economy is OVERHEATED and resources are OVERUSED and needs to be slowed down.

Sometimes Real GDP will be LOWER than Potential GDP and this would mean that resources are UNDERUTILIZED.

Sometimes Real GDP is equal to Potential GDP. This is the IDEAL situation as it means the Economy is in Equilibrium.

The point of the above is to illustrate that Real GDP fluctuates around Potential GDP and this is because of the BUSINESS CYCLE.

The Business Cycle is a cycle that the Economy goes through over a period of time and has four stages, which consist of two phases: a RECESSION, an EXPANSION, and two turning points: a PEAK and a TROUGH.

Real GDP tends to be more than Potential GDP when in an Expansion and lower than Potential GDP when in a Recession.

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