Suppose that real GDP is $10 trillion and the unemployment rate is 5.5%. If, over the next year, potential output grows by 2.5 percent and the unemployment rate decreases by 1 percentage point to 4.5%, real GDP will increase to
A) $10.25 trillion.
B) $10.1 trillion.
C) $10.5 trillion.
D) $10.7 trillion.

Question

Quizplus · Accepted Answer

The potential output growth of 2.5 percent on a $10 trillion GDP results in a $250 billion increase, making the new potential GDP $10.25 trillion. However, the decrease in the unemployment rate from 5.5% to 4.5% indicates an economy growing faster than its potential, suggesting actual GDP will increase beyond the potential output growth. Therefore, the closest estimate given the options is $10.5 trillion, acknowledging both the potential growth and the implied additional growth from reduced unemployment.

Suppose That Real GDP Is $10 Trillion and the Unemployment