Question

Despite the recent declines in quarterly and annual RGDP, America's economy must be improving because the unemployment rate as reported by the BLS has also continued to decline. Do you agree or disagree? Support your position using economic terminology (being careful to explain). (Note, this is not a literal example and is not meant to be directly applied to current events.)

Answer 1

Answer: agree

Gross domestic product (GDP) has two parts – real (R) and nominal (N). The equation is as below:

RGDP = NGDP – Inflation

(Or)

NGDP = RGDP + Inflation

Therefore, inflation plays a vital role in GDP calculation – RGDP may decline but if inflation is high NGDP must increase.

There is an inverse relationship between inflation and unemployment – if one increases the other decreases. This is shown in the following graph: