When there is an inflationary gap,(actual)Real GDP is __________ Natural Real GDP,and the (actual)unemployment rate is __________ the natural rate of unemployment.

Question

Quizplus · Accepted Answer

An inflationary gap means that actual Real GDP is above the potential GDP or the natural level of Real GDP. This suggests that the economy is producing output beyond its capacity, and this implies that there is an excess demand for goods and services, leading to higher prices and inflation. Therefore, the actual Real GDP is greater than Natural Real GDP.

As the economy produces output beyond its potential, the firms require more labor to produce more goods and services, leading to a decline in unemployment. Hence, the actual unemployment rate is less than the natural rate of unemployment.

When There Is an Inflationary Gap,(actual)Real GDP Is __________ Natural