Question

Year Actual Real GDP Potential GDP Price Level Unemployment 2017 KD 12.4 billion KD 12.4 billion 100 4.5 % 2018 KD 10.5 billion KD 12.4 billion 96 16% 2019 KD 12.7 billion KD 12.4 billion 105 3% 1. Describe country's macroeconomic condition in these three years in terms of macroeconomic equilibrium and business cycle. Describe all macroeconomic indicators?

Answer 1

In Year 2017, we see that economy is stable because it is at full employment equilibrium which means that all the resources are allocated and used efficiently. This can be seen by the fact that potentail GDP equals Actual Real GDP. Here price is also stable, denoted by 100. Here unemployment level is 4.5% which is also called NAIRU which is the level of employment that will remain even with a non accelerated infaltion rate. Here the economy is stable and is expected to be in the expansion path of a business cycle.

In the year 2018, it is a case of underemployment equilibrium which shows that actual rate of GDP is lesser than potential GDP. Hence economy will not be stable as resources are not used efficiently which means there will be lack of demand. This is shown by a deflation in price level to 96. also unemployment is high shown by 16%. This suggests that demand in the economy is low and hence supply cannot also improve efficiently as costs are too high. hence policy advocation is rquired. Here the economy is not performing well and is near the trough of the business cycle and may be going through a recession phase. It will move to a revovery if things are planned efficiently.

In the year 2019, the actual rate of GDP is more than potential GDP. This is a case of above full empployment equilibrium. Here the uonly unemployment would be structural and frictional unemployment which is also called natural rate of unemployment and is shown here as 3%. The price level here is high which shows excess demand in the economy which is an inflationary pressure on the eocnomy, and is represented as 105. The economy is expected to see a fall in GDP as high prices cannot be sustained. Here the economy has achieved a boom and is not expected to grow further. It will in most likelihood move through a contraction phase in the business cycle.

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