explain the relationship between real GDP and potential GDP and between the unemployment rate and the...

explain the relationship between real GDP and potential GDP and between the unemployment rate and the natural unemployment rate as the economy moves through a business cycle.

Expert Solution

Real GDP and Potential GDP

When the economy is at full employment, real GDP equals potential GDP; so actual real GDP is determined by the same factors that determine potential GDP.
Real GDP can exceed potential GDP only temporarily as it approaches and then recedes from a business cycle peak. So potential GDP is the sustainable upper limit of production.
Real GDP fluctuates around potential GDP, which means that on the average over the business cycle, real GDP equals potential GDP.

Actual Unemployment Rate and Natural Unemployment Rate

The natural rate of unemployment is the unemployment rate at full employment.
When the economy is at full employment, real GDP is equal to potential real GDP. By contrast, when the economy is below full employment, the unemployment rate is greater than the natural unemployment rate and real GDP is less than potential. Finally, when the economy is above full employment, then the unemployment rate is less than the natural unemployment rate and real GDP is greater than potential.
When the actual unemployment rate is higher than the natural unemployment rate, the inflation rate decreases; when the actual unemployment rate is lower than the natural unemployment rate, the inflation rate increases.

Rahul Sunny answered 2 years ago

What is the relationship between the unemployment rate and GDP?

If actual GDP is below potential GDP, then the unemployment rate is _____________ the natural rate. A)...

If actual GDP is below potential GDP, then the unemployment rate is _____________ the natural rate. A) below B) above C) right at D) cannot be determined without inflation rate Fiscal policy affects the economy through: A) Taxes B) Government Spending C) Interest Rates D) Taxes and Government Spending The Federal Reserve Bank’s decisions on monetary policy are made by the: Board of Governors B) FOMC C) Reserve Banks D) Federal Reserve Bank of New York One of the FED’s responses to the COVID crisis has been to: Lower the...

Explain the relationship between the unemployment rate and economic growth, and why the unemployment rate is...

Explain the relationship between the unemployment rate and economic growth, and why the unemployment rate is or is not significant to the economy.

1-In the long run, what is the theoretical relationship between the rate of growth in real GDP and the real rate of interest?

1-In the long run, what is the theoretical relationship between the rate of growth in real GDP and the real rate of interest? A) Over the long run, rates of growth in real GDP and the real interest rate should be equal. B)There is little correlation between rates of growth in real GDP and the real interest rate. C)Rates of growth in real GDP and the real interest rate have both historically been approximately 5% in the United States....

The effectiveness of fiscal policy in closing gaps between potential real GDP and real GDP is...

The effectiveness of fiscal policy in closing gaps between potential real GDP and real GDP is diminished by: a) lags (inside and outside); and b) crowding out. Explain what inside and outside lags are, and explain what crowding is. Be sure to explain how the lags and crowding out reduce the effectiveness of fiscal policy.

Define GDP and differentiate between Nominal and Real GDP What is Unemployment and Inflation?

What is the current real GDP growth rate, unemployment rate, and CPI inflation rate for the...

What is the current real GDP growth rate, unemployment rate, and CPI inflation rate for the US economy? What are these numbers telling us? How do they compare to past values? Why are the values what they are? In the future, how does one expect them to change? Analyze the patterns related to this data and explain how the US economy is doing. Cite two trustworthy articles to support your case.

What is the difference between nominal and real GDP? What is unemployment? Which types of unemployment...

What is the difference between nominal and real GDP? What is unemployment? Which types of unemployment do you know? Which type of unemployment can be considered as acceptable? What should be its level? How is inflation calculated? What is the optimal level of inflation in the economy? What is “bad inflation”? Phillips curve. Which instruments of monetary policy do you know? Which instruments of fiscal policy do you know? What is contractionary/expansionary monetary policy? In which stage of business cycle...

What is the relationship between inflation, nominal GDP growth and real GDP growth?

Explain the different types of unemployment and their relationship to the natural rate of unemployment and...

Explain the different types of unemployment and their relationship to the natural rate of unemployment and full employment. Include in your analysis the three key indicators that describe the state of the labor market of an economy.

Question