When real GDP is below potential GDP, the unemployment rate is above the natural rate.

Question

Quizplus · Accepted Answer

When real GDP is below potential GDP, it means that the economy is operating below its full capacity, leading to an increase in unemployment. The natural rate of unemployment is the rate that exists when the economy is at full employment and there is no cyclical unemployment. Therefore, when real GDP is below potential GDP, the unemployment rate is above the natural rate.

When Real GDP Is Below Potential GDP, the Unemployment Rate