Question

"Aggregate Demand and Aggregate Supply" is about the model that shows us how to distinguish between demand shocks and supply shocks, creating differences between what the economy could produce at full employment, or "potential output," and what is currently being produced, know as an output "gap."

Is there currently a negative output gap, has the output cap closed finally, or is there now a positive output gap? After doing some research online, and reviewing the key terms of this chapter discuss the following:

1. Is the economy in a recessionary gap? an inflationary gap? (Note "inflation" of prices is not the same as an "inflationary gap" between potential output & actual output) Or is the U. S. Economy cruising steadily along at full employment? What evidence is there in the labor force (bea.gov), in the capital utilization rate published by (www.federalreserve.gov)?

2. Use your new economic vocabulary to discuss what economic indicators support your view. (Use current economic data from the Bureau of Labor Statistics, the Census Bureau, the Federal Reserve, etc., and cite your sources).

Answer 1

1.

Currently in United States, there is one job opening for every person that is unemployed.

However, what that really means is that there is a real mismatch of skills and job openings. Say there are openings for 100,000 software people but only 1000 people with the correct software skills, that is an inflationary gap. If there are openings for 1000 coal minors but 100,000 skilled coal miners available, that would be a deflationary as people will accept whatever it takes to get the job.

The U.S. labor market as a whole is at full employment. As of December 2016, the civilian unemployment rate was 4.7%, well below the long-term average of 5.9%. Equally or more important, the time required for an employer to fill a job vacancy currently takes longer than any previous period on record – 27.4 working days, up from 23 working days in July 2006, before the recession began.

This does not mean that all parts of the country are doing equally well. Likewise, the economy continues to suffer from a slowdown in productivity growth. But the labor market is quite tight on a national basis.