Question

If a structural surplus exists but the government’s budget is balance, then_____

A. Real GDP is less than potential GDP

B. Outlays are less than receipts

C. Receipts are less than outlays

D. Potential GDP is less than real GDP

Answer 1

A. Real GDP is less than potential GDP :

When this situation happens it does mean that there is full employment GDP then a recessionary gap exist.

At the same time: Unemployment rate > natural rate of unemployment. Since more job seekers are in the market, they tend to settle with a lower wage. Lower wage will lower the AS curve and causing the price to decrease. Lower price will increase consumption. This process will continue until the economy reaches the long run equilibrium (potential real GDP).

If the potential GDP is at 700, the following graph presented a recessionary gap between SR equilibrium and the LRAS curve.

Inflationary gap

If real GDP > Potential real GDP (full employment GDP), then an inflationary gap exist. At the same time: Unemployment rate < natural rate of unemployment. Since job seekers are less than job openings in the market, employers are forced to raise the wage to attract new workers. High wage will decrease the AS, and raise the price. Higher price will lower consumption. This process will repeat until the long run equilibrium is reached.

If the potential GDP is at 500, the following graph presented an inflationary gap between SR equilibrium and the LRAS curve.

GDP is the final value of all goods and services produced within the geographical boundaries of a nation within a specific period of time.

Real GDP : It is what the economy is actually producing.

Potential GDP : It is what the economy could have produced if all the available resources were fully utilised. The maximum production capacity of the economy is measured by its potential GDP.

Suppose a economy has only one factor of production say 100 units of labour. Each labourer can produce $5 worth of goods in a year. So the maximum possible output produced by the economy in a year will be worth of 5 × 100 = 500 dollars. This is the Potential GDP. But this is not the actual scenario in most of the cases. Full labour force may not be available ( say 20 of them fall sick ), there maybe appriciation of home currency which increases the value of output say from $5 to ?10 per unit of labour. All these scenarios happen in real world economies which either reduce the GDP ( 80 × 5 = 400) or increase it (10 × 100 = 1000). This GDP which is measured taking into account all fluctuations of business cycle is called is Real GDP.