Indicated by y also know as potential gdp grows over

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Indicated by Y* also know as Potential GDP grows over time to reflect increases in the labor force and real GDP changes can indicate recessions or expansions when economy is functioning at its potential output, unemployment is at what is called the “natural rate of unemployment” o Indicated by u* Natural Rate of Unemployment (u*) – the remaining unemployment rate when the economy is stable and there is zero cyclical unemployment can be attributed to structural and frictional unemployment Gap – the different between the potential output (Y*) (potential GDP) and its actual output (actual GDP) economist analyze output gaps and figure out the reasons for the gaps in order to stabilize the economy Negative Output Gap – actual GDP is less than potential GDP during a negative output gap firms can expand their output, as they have a lot of spare capacity to use Positive Output Gap – full production potential has almost been reached, some sectors will experience supply shortages some firms may have to pay overtime or provide other incentive to increase GDP Output Gaps – are caused mostly by the spending of the entire economy governmental policies can affect output by either increasing or decreasing total spending Business Cycles – short term irregular fluctuations in an economy sometimes called cyclical fluctuations
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vary in severity as well as duration Coincident Indicators – factors that researcher use to determine whether or not an economy is in recession these indicators usually coincide with an overall movement in the economy Example: employment level of non-agricultural workers is consider a coincident indicator Okun’s Law – state that for every 1% of cyclical unemployment, there is a 2% output gap for potential output (Y*) Example: if the cyclical unemployment is at 4.2% then the nation’s output gap would be 4.2% * 2 = 8.4% Rationing – distributing a good or resource among consumers that would like to have more than is available Rationing artificially affects the demand for that good or resource thereby reducing the price Sunk Cost – a cost beyond recovery the moment a consumer decides to purchase the good or service Unavoidable costs, and therefore should not play a role in economic decision-making o Example: non-refundable movie tickets Marginal Cost – the increase in total cost that come from producing one additional unit of a specific good When marginal costs are higher than average variable costs, average variable costs are increasing Marginal Benefit – is the increase in total benefit that comes from producing one additional unit If the marginal benefit outweighs the marginal cost then it is safe to produce more Average Cost Benefit – it is important to analyze how much an activity cost, but it is not useful in deciding whether or not to expand the activity Average Benefit – can be found by dividing the total benefit of the activity by the number of units of the activity
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