Question

Real GDP can increase both because an economy has unemployment and because of economic growth. Explain fully the difference between these two ways of increasing GDP. Why does the Keynesian model focus only on increasing GDP by reducing unemployment and not on economic growth?

Answer 1

Cyclical unemployment in the aggregate demand and so is also in the aggregate supply function and when the equilibrium is substantially below growth rate of GDP or Gross Domestic Product and relatively small when the equilibrium is near potential GDP

The natural rate of unemployment as determined by the labor market forces in the economy is built into potential GDP and is hence the reason why it affect REAL GDP when there is unemployment as well as economic growth.

Cyclical unemployment will bounce up and down in a short space of time or in the short run according to the movement of GDP.

Keynesian economists believe that increasing aggregate demand will lead to higher GDP growth thereby reducing unemployment there will be a higher money supply in the economy which will invariably result in a increasing GDP.Economic growth could be staggered toward the employed only and hence the gdp would increase but the eventual weight of the unemployment phenomenen will play a vital role in potential GDP growth.