Final answer:
Full-employment GDP, also known as potential GDP, is the output level when unemployment is at its natural rate. To find the required government spending (G) to achieve full employment, one would substitute the full employment output level (Y) into an economic equation and solve for G.
Step-by-step explanation:
The term full-employment GDP is also known as potential GDP, and refers to the level of output that the economy is producing when unemployment is at the natural rate of unemployment, which includes frictional and structural unemployment but not cyclical unemployment. To determine the level of government spending necessary to achieve full employment GDP, one can use an economic equation where Y represents the full employment level of output and G is government spending.
Assuming full employment occurs when there is 3 percent unemployment and that full employment GDP is 3,500, one would plug in 3,500 for Y in the given equation and solve for G. The equation provided in Step 9 from the reference can also act as an example. If the full-employment level of output is assumed to be 6,000, the equation to calculate the necessary level of G would be:
6000 = 200+ 0.9(6000 - 0.3(6000)) + 600 +G+600 -0.1(6000 - 0.3(6000))
The arithmetic solution to this problem indicates that an increase in government spending to 1,240 from an original level of 1,000 would bring the output up to the full employment level of GDP.