The concept of 'Potential Output' or 'Potential GDP' refers to:
A. Nominal GDP adjusted for population
B. The maximum output an economy can produce with current resources and technology without inflationary pressure
C. Actual GDP in a given year
D. GDP at current market prices
Answer: Option B
Solution (By JKSSB Mock Tests)
Potential output is the level of real GDP that can be sustained over the long term without generating inflationary or deflationary pressures, given existing resources and technology.
Explanation:
The twin deficit hypothesis refers to the co-existence of a fiscal deficit and a current account deficit, which can be linked through the absorption approach or saving-investment identity.
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