The shortfall between actual real GDP and potential GDP
A)decreases as the unemployment rate rises.
B)increases as the unemployment rate rises.
C)increases as the employment rate rises.
D)decreases as the labor force increases.

Question

Quizplus · Accepted Answer

The shortfall between actual real GDP and potential GDP, also known as the GDP gap, is the difference between what the economy is currently producing and what it could be producing at full employment. As the unemployment rate rises, actual real GDP falls, which increases the GDP gap. Conversely, as the unemployment rate falls, actual real GDP rises, which decreases the GDP gap. Therefore, the answer is B, the GDP gap increases as the unemployment rate rises.

The Shortfall Between Actual Real GDP and Potential GDP