Question

Suppose the unemployment rate in the United States is 10% and the structural unemployment rate is 3% and the frictional unemployment rate 5%. The actual Real GDP level is $12 billion and the Natural Real GDP is $20 billion. Please answer questions 3a through 3c below.

3a. Calculate the natural unemployment rate and the cyclical unemployment rate for the United States. Also, please calculate the recessionary gap or the inflationary gap using the actual Real GDP level and the Natural Real GDP figures above. Please show all of your calculations and work.

3b. Based on the information above and from the calculation from 8a, is the United States in a recessionary gap or an inflationary gap? Explain why the United States is in an inflationary or a recessionary gap.

3c. As an economist, what economic policies can you suggest to President Obama to help combat the inflationary gap or the recessionary gap in the United States? Explain why the policies might help to combat the inflationary or recessionary gap in the U.S. economy.

Answer 1

Answer :

3a.

The natural unemployment rate is the sum total of structural unemployment rate and frictional unemployment rate

So,

Structural unemployment rate is = 3%

Frictional unemployment rate is = 5%

Natural unemployment rate is = 3% + 5% = 8%

Natural unemployment rate is 8%

The cyclical unemployment rate : it is the difference between current unemployment rate and natural unemployment rate

Current unemployment rate is = 10 %

Natural unemployment rate is = 8%

The cyclical unemployment rate = 10% - 8% = 2%

cyclical unemployment rate is 2%

The recessionary gap or the inflationary gap: is the difference between actual real GDP level ($12 billion) and natural (potential) real GDP ($20 billion)

So, the recessionary gap or the inflationary gap is = $12- $20 = -$8 billion

3b . Based on the above information we can say that the United States is in a recessionary gap because the natural or potential real GDP is greater than the actual real GDP.

3c. following policies can help to combat the recessionary gap in the united states :

• Increase in government expenditure
• Reduction in tax rates
• Reduction in interest rates
• Increase in capital flow in the economy

All these policies will help to increase the money supply in the economy which will increase people’s income and reduce price level in the economy.