The initial Phillips curve relationship implied that the opportunity cost of __________ __________ was higher __________.
If high unemployment lasts a long time, it could cause potential real GDP to fall. (true or false)
The initial Phillips curve relationship implied that the opportunity cost of __________ __________ was higher __________.
The Phillips curve plotted inflation against unemployment. So two correct answers:
low inflation/unemployment or
low unemployment/inflation
reducing, unemployment, inflation
The initial Phillips curve relationship implied that the opportunity cost of reducing inflation was higher unemployment.
Now, regarding the statement "If high unemployment lasts a long time, it could cause potential real GDP to fall," the correct answer is true. When high unemployment persists over an extended period, it can lead to a decline in potential real GDP. This is because unemployed workers are unable to contribute to the productive capacity of the economy, resulting in a lower output level. Additionally, prolonged unemployment can also lead to a decrease in skills and human capital, which further diminishes economic potential.
To understand why this statement is true, let's break it down:
1. High Unemployment: High unemployment refers to a situation where a significant portion of the labor force is without work and actively seeking employment. This high level of unemployment suggests that resources in the form of labor are underutilized in the economy.
2. Potential Real GDP: Potential real Gross Domestic Product (real GDP) represents the maximum level of output an economy can produce when all resources are fully utilized. It is a measure of the long-term economic capacity of an economy.
3. Impact on Potential Real GDP: When high unemployment persists over an extended period, it can lead to a decline in potential real GDP. This occurs because the unemployed workers are not able to contribute to production, which reduces the overall level of output that can be produced. Consequently, the economy operates below its full productive capacity.
It is important to note that the relationship between unemployment and potential real GDP is complex and influenced by various factors such as labor market dynamics, technological advancements, and government policies. However, a prolonged period of high unemployment generally implies a negative impact on potential real GDP.