Potential output represents the highest level of real GDP an economy can sustainably produce when all resources are fully utilized at their normal levels of efficiency.
Imagine a car engine running at its maximum speed without any issues. Potential output is like the top speed that the engine can reach without overheating or causing damage.
Aggregate demand (AD): The total demand for goods and services in an economy at a given price level.
Aggregate supply (AS): The total amount of goods and services that all industries in an economy are willing and able to produce at a given price level.
Full employment: A situation where all available labor resources are being utilized, resulting in the lowest possible unemployment rate.
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