Question

​Sources:U.S. Bureau of Labor​ Statistics; and U.S. Bureau of Economic Analysis. 1. In​ 1969, actual real GDP was greater than potential real GDP. Which of the following best explains​ this? A. The data reported by the Department of Commerce are incorrect. B. There has been a supply shock that has reduced potential output. C. The economy can produce a level of GDP above potential GDP in the short run. D. The economy is in a recession and thus potential GDP is less than actual GDP. 2. Even though real GDP in 1970 was slightly greater than real GDP in​ 1969, the unemployment rate increased substantially from 1969 to 1970. Which of the following explains how unemployment could have increased even though output did not​ change? A. Because there was more​ inflation, there must be more unemployment. B. Potential GDP increased​ significantly, but actual GDP did​ not, and thus there is unemployment. C. Labor productivity​ declined, and thus the demand for labor​ fell, creating unemployment. D. There must have been a decrease in aggregate demand that caused a recession.

Answer 1

1) C. The economy can produce a level of GDP above potential GDP in the short run.

When the actual GDP is greater than the potential GDP it means that in the short run the economy is able to grow significantly, although high inflation may result.

2) B. Potential GDP increased​ significantly, but actual GDP did​ not, and thus there is unemployment.

Since only potential GDP increased, but not real GDP, then unemployment started to rise as a result of a higher inflation rate without an economic growth.