Question

What does the economy look like during an unemployment gap? What type of unemployment rate is it compared to the natural rate of unemployment? What about inflation?

Answer 1

Unemployment gap is also known as Recessionary Gap. It is a term routed in macroeconomics theory that summarizes the situation where an economy is operating at below its full employment equilibrium. Under this situation, the level of real gross domestic product is lower than the level at full employment, which puts downward predssure on prices in the long run. It is also known as Contractionary Gap. Often, these gaps are evident during times of economic downturn and are associated with higher unemployment numbers. The Natural Rate of Unemployment is compared to a Cyclical Unemployment rate of Zero. However this doesnot mean that natural rate of unemplouyment is zero as frictional and structural unemployment is not zero.

In economics Inflation is a sustainable increase in the general price level of good s and services in an economy over a period of time . Under conditions of inflation, the prices of things rise over time. As inflation rises, every dollar yoy own buys a smaller percentage of a good or service. When price rises and alternatively when the value of money falls you have inflation.