Question

According to Business Cycle Model, if unemployment has been consistently higher than normal, real GDP is ( choose one)

a) higher that potential real GDP

b) lower than potential real GDP

c) decreasing over time

d) increasing over time

Answer 1

In the business cycle model, if  unemployment has been consistently higher than normal, real GDP is lower than the potential real GDP, this is because if there is more unemployment in the economy, then it means production is decreasing because the employment of labor is decreasing. Since there is less labors working in the economy, so less production will be there. It means the economy is producing less than its potential level.

Hence it can be said that real GDP is lower than the potential real GDP.

Hence option b is the correct answer.

Option b; lower than the potential real GDP.