Potential output is not Maximum output

We must emphasize a subtle point about potential output: Potential output is die number output but not die absolute maximum output that an economy can produce. The economy can operate with output levels potential output for a short time. and indeed this was die situation & die long economic expansion of die late 990s. Factories and workers can work overtime for a while. but production potential is not sustainable. If die economy produces more than its potential output for long. price tends to rise as unemployment fans factories are worked intensively. and worriment and businesses try to extract and profits.

A useful analogy is someone rennin& a marathon. Think of potential output as the maximum speed that a marathoner can run without becoming &”overheated” and dropping out from exhaustion. yearly die runner can run faster than die sustainable pace for a while. just as die us. economy V- faster than potential growth rate during die. But over die entire course. die economy. like die marathoner. can produce only at a maximum sustainable “speed.” and this output speed is what we call potential output.

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