Macroeconomics

Using the graph of the long run and short run aggregate supply and demand, show how the GDP generated at full employment is the potential output the economy can generate.

In order to better explain this concept, assume that in the short-run, wages and prices are flexible enough to adjust, that at full employment, firms and workers are able to negotiate lower nominal wages, which will shift the short run aggregate supply rightward. Also, keep in mind that the natural rate of GDP and the natural rate of unemployment are defined in the long run and represented by a vertical long run aggregate supply curve.