The following table gives the potential GDP and real GDP for a very small econom

Question

The following table gives the potential GDP and real GDP for a very small economy, both measured in 2005 dollars. Real GDPPotential GDP output Gap 101 110 Dollars) (2005 Dollars) 100 2005 2001 2002 2003 2004 108 106 110 114 a) Fill in the column for the output gap. Instructions: To answer this question, complete the output gap column in the table above. enter 0 wherever required bj Would you expect the unemployment rate to be higher in 2002 or 2004? In front of those numbers. Leave no cells blank-be certain to you are entering any negative numbers be sure to include a negative sign t- D In 2002 because the output gap is positive. In 2004 because the output gap is positive. O In 2004 because the output gap is negative. 0 In 2002 because the output gap is negative. c) in which year would you expect it to be easiest to find a job? (Assume the NAIRU is the same each year)

Explanation / Answer

A.

Output gap = Potential GDP - Real GDP

B.

Correct Answer:

In 2004 because the output gap is positive.

Since in the output gap is positive, it means that the economy is not operating at full employment. Hence, there is an increased level of unemployment in comparison to the 2002 when economy has exceeded the potential GDP.

C.

In 2004, because the economy has yet to achieve the full employment level. Hence, it is easier to find the job.

Year Real GDP (2005 Dollars) Potential GDP     ( 2005 Dollars) Output gap 2001 100 101 1 2002 108 106 -2 2003 110 110 0 2004 111 114 3

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