Potential GDP is an estimate of the economy’s ability to produce goods and services if the
a. trade balance is zero.
b. federal budget is balanced.
c. labor force is fully employed.
d. price level is stable.

Potential GDP represents the maximum output an economy can achieve under full employment conditions, meaning that all resources, particularly labor, are utilized efficiently without creating inflationary pressures. It acts as a benchmark for assessing the actual economic performance and guides policymakers in setting fiscal and monetary policies.

To get a deeper understanding of potential GDP, exploring concepts like the business cycle can be enlightening. The business cycle depicts the fluctuations in economic activity over time, showcasing periods of expansion and contraction, which ultimately play a huge role in how potential GDP is measured and interpreted in relation to current GDP figures.