Question

Suppose the economy enters a recession. If government policymakersdash​Congress, the​ president, and members of the Federal Reservedashdo not take any policy actions in response to the​ recession, what is the likely​ result? Which of the following four possible outcomes best describes the likely effects on the unemployment rate and GDP in both the short run and the long​ run? i. The unemployment rate will rise and remain higher even in the long​ run, and real GDP will drop below potential GDP and remain lower than potential GDP in the long run. ii. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long​ run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iii. The unemployment rate will rise and remain higher even in the long​ run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run. iv. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long​ run, and real GDP will drop below potential GDP in the short run and remain lower than potential GDP in the long run. A. Statement iii is correct. B. Statement ii is correct. C. Statement iv is correct. D. Statement i is correct.

Answer 1

The correct answer is ii. The unemployment rate will rise in the short run but return to the natural rate of unemployment in the long​ run, and real GDP will drop below potential GDP in the short run but return to potential GDP in the long run.

Step-by-step explanation:

The economic recession occurs when there is a decrease in economic activity within a specific country. If shock actions are not taken, the most likely thing that happens is that companies stop hiring staff because they will require much less labor. This situation is explained in Okun's law, which mathematically demonstrates the relationship between the unemployment rate and economic growth.