When real output growth is above potential output growth, the output gap is positive and the unemployment rate is below the natural rate.

Question

Quizplus · Accepted Answer

When real output growth is above potential output growth, it means that actual output is exceeding what the economy is capable of producing in the long run (which is potential output). This results in a positive output gap, which indicates that the economy is operating beyond its capacity. When output is high, firms may need to hire more workers to meet the demand, leading to a lower unemployment rate. Therefore, the unemployment rate will be below its natural rate, which is the rate that prevails when the economy is producing at its potential.

When Real Output Growth Is Above Potential Output Growth, the Output