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Which of the following is true about potential GDP: Select the correct answer a. For a nation to...

Question:

Which of the following is true about potential GDP:

Select the correct answer

a. For a nation to be at its potential GDP, The unemployment rate has to be zero.

b. If the current unemployment rate is below the natural unemployment rate, then

c. When current is greater than potential GDP, then current employment will be below the natural unemployment rate

d. Current GDP will be below potential GDP, A nations actual GDP can never be greater than its potential

Output Gap

Output Gap is difference between real GDP and potential GDP of an economy. It is usually used by policymakers to determine if the economy needs more or less monetary stimulus.

Answer and Explanation:

c. When current is greater than potential GDP, then current employment will be below the natural unemployment rate


The Potential GDP of a country is taken from the historical trend line of the real GDP by smoothing out the peaks and troughs. The current GDP can be greater than the potential GDP which means that the current employment is lower than the natural unemployment rate. The natural unemployment rate is computed based on the potential GDP.


the following choices are incorrect, the reasons are the following:

a. For a nation to be at its potential GDP, The unemployment rate has to be zero. False unemployment rate can become zero but this is only applicable in an ideal world where every worker is matched with the correct job. Potential GDP considered by policymakers are more realistic with a certain unemployment rate greater than zero.


b. If the current unemployment rate is below the natural unemployment rate, then. False the statement is incomplete and incorrect.


d. Current GDP will be below potential GDP, A nations actual GDP can never be greater than its potential. False Current GDP can either be below or above potential GDP as the potential GDP is based on the trend of historical real GDP.


Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
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