The LRAS shows where the economy should be. The SRAS and the AD shows where the...

The LRAS shows where the economy should be. The SRAS and the AD shows where the economy is by creating the short-run equilibrium. Do you think that we are currently at the LRAS in our current economy?

I do not understand how to figure this out. Please help! Thank you

Expert Solution

The current US economy is not at LRAS, because it is still growing at the rate of 3.2% (first quarter of 2019) and it shows that there is still some unused capacity in the economy. So, economy is not at LRAS or potential GDP. Further, unemployment rate is at 4% at present. It seems that it is nearly equal to the natural rate of unemployment. But, a bigger size of the employed people are still involved in part time jobs, though they want to do a full time job. 4% rate is also an U-3 unemployment rate that does not consider discouraged workers or underemployed workers. For this, U-6 unemployment rate should be used and it is 7.3%. It means that there is still a gap of 3.3% between U-6 unemployment rate and natural rate of 4%.

As per the Okun's law, a 1% increase in unemployment rate, brings down the GDP by 2% from potential GDP. It means that there is still a gap between actual GDP of today and LRAS.

Rahul Sunny answered 1 year ago

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