Question

Given below is the the real GDP and potential GDP for the fictitious country "Alpha." a. Use the date to determine the the year-to-year growth rates of real GDP, the output gap as a percentage of potential GDP and state whether the gap is a recessionary gap or an expansionary gap. Instructions: Enter your responses as a percentage rounded to two decimal places. If you are entering any negative numbers be sure to include a negative sign (-) in front of those numbers. Output gap 2005 2006 2007 2008 2009 2010 2011 2012 Real GDP $17,500 $18, 2001 $18.500 $18.400 $18,200 $18.600 519,200 $19,900 potential GDPReal GDP growth $17,300 $17,800 $18,300 $18.800 $19,300 $19,700 $20, 100 $20,500 Type of gap Click to select Click to select Click to select Click to select Cakto select Eick to see GRO Click to select b. Use the data above to graph Alpha's real GDP between 2005 and 2012 real GDP values from year 2005 until 2012 Instructions: Use the tool 'real GDP to graph the Business Cycle Tools Real GDP 20,000 19 800

Answer 1

ANSWER:

(a) Working notes:

(i) Real GDP growth rate in year N = {[Real GDP, year N / Real GDP, year (N - 1)] - 1} x 100%

(ii) Output gap = [(Real GDP (RGDP) - Potential GDP) / Potential GDP] x 100%

(iii) If Real GDP > (<) potential GDP, the economy experiences an Expansionary (Recessionary) gap.

Year RGDP Potential GDP RGDP growth Rate Type of Gap Output Gap 2005 17,500 17,300 1.16% Expansionary 2006 18,200 17,800 4.00% 2.25% Expansionary 2007 18,500 18,300 1.65% 1.09% Expansionary 2008 18,400 18,800 -0.54% -2.13% Expansionary -1.09% -5.70% Recessionary 2009 2010 18,200 18,600 19,300 19,700 2.20% -5.58% Recessionary 2011 19,200 20,100 3.23% -4.48% Recessionary 2012 19,900 20,500 3.65% -2.93% Recessionary

(b) Graph Business Cycle Tools real GDP Real GDP 20,000 19,800 19,600 19,400 19,200 19,000 18,800 18,600 18,400 18,200 18,000 17,800 17,600 17,400 2011 2010 2009 2008 2007 2006 2005 2004 012 Year

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