The economy's potential output corresponds to the level of

The economy's potential output corresponds to the level of production that can be sustained in the long run without causing inflationary pressures. It represents the maximum level of real GDP (Gross Domestic Product) that an economy can produce while utilizing all its resources efficiently. In other words, potential output is the economy's capacity to produce goods and services when all factors of production (labor, capital, and technology) are fully employed.

Factors that contribute to potential output include the size of the labor force, the level of technology, the quantity and quality of capital, and the efficiency with which these inputs are used. When the actual output is equal to potential output, the economy is operating at its full capacity. However, during periods of economic downturns or recessions, actual output may fall below potential output, leading to unemployment and underutilization of resources. Conversely, if actual output exceeds potential output for an extended period, it may lead to inflationary pressures. Central banks and policymakers often monitor the economy's potential output to make informed decisions about monetary and fiscal policies.