Why did this increase in unemployment occur

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Reference no: EM131023280

Consider the data in the following table for 1969 and 1970 (where the values for real GDP and potential GDP are in 2009 dollars):

Year  Actual Real GDP Potential GDP Unemployment Rate
1969 $4.71 trillion $4.63 trillion 3.50%
1970 $4.72 trillion $4.80 trillion 4.90%

a. In 1969, actual real GDP was greater than potential GDP. Briefly explain how this is possible.

b. Even though real GDP in 1970 was slightly greater than real GDP in 1969, the unemployment rate increased substantially from 1969 to 1970. Why did this increase in unemployment occur?

c. Was the inflation rate in 1970 likely to have been higher or lower than the inflation rate in 1969? Does your answer depend on whether the recession that began in December 1969 was caused by a change in a component of aggregate demand or by a supply shock?

Reference no: EM131023280

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