2 Potential output calculation In class, we considered the model of production 1'2 = At (uthla Lil'1 (1) where all variables and parameters are as in the standard model of production and u: is capital utilization. We assumed that at = 1 corresponds to capital utilization that rms would choose if the economy was neither in a recession nor in an expansion. Question 2.1 Explain why in an expansion, rms would choose "at > 1 and why this would not sustainable in the long run. Question 2.2 The potential output of the economy is dened as output that the economy would achieve if it was neither in an expansion nor in a recession. Use this denition of potential output to decompose actual output Yt in equation (1) into potential output 17 and the business cycle component it (also called the output gap)