Question

If actual GDP equals potential GDP, then what is the relationship between the actual unemployment rate and the natural rate of unemployment?

1) There is an expansionary gap.
2) There is a recessionary gap.
3) The actual unemployment rate is less than the natural rate of unemployment.
4) The actual unemployment rate is greater than the natural rate of unemployment.
5) The actual unemployment rate equals the natural rate of unemployment.

Answer 1

When actual GDP equals potential GDP, the economy is at full employment and thus the actual unemployment rate equals the natural rate of unemployment. This is a condition where cyclical unemployment is zero and the remaining unemployment is due to frictional and structural factors.

Step-by-step explanation:

If actual GDP equals potential GDP, then according to economic theory, the economy is considered to be at full employment. This means that the actual unemployment rate would be equal to the natural rate of unemployment.

At this state, there should be no cyclical unemployment, and the unemployment that does exist will be primarily due to frictional and structural factors.

Therefore, there is not an expansionary gap (since real GDP is not above potential) nor a recessionary gap (since real GDP is not below potential), and neither is the actual unemployment rate less than nor greater than the natural rate of unemployment.

In this circumstance, the correct answer is that the actual unemployment rate equals the natural rate of unemployment, reflecting a condition of full employment where the number of people seeking jobs roughly equals the number of job vacancies, and the unemployment present is mostly frictional or structural rather than cyclical.