Natural Rate of Unemployment

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The economy of Chicagoland is currently producing $65 Million worth of goods and services (current real GDP). Full employment output for Chicagoland is $75 Million worth of goods and services (full employment real GDP). The price level has been declining recently. This has occurred due to a negative AD shock.

1. Use an AD/AS graph to show the macroeconomy of Chicagoland. Label the graph correctly. a. First, show the long run equilibrium of Chicagoland using aggregate demand (AD) and short run aggregate supply (SRAS) at full employment. Label the full employment output Yf, and the corresponding price level, PL. b. Then, use Y1 to represent the current real GDP and PL1 to represent the current price level.

2. Is the current rate of unemployment higher or lower than the natural rate of unemployment? How do you know?

3. Recall that the Federal Reserve has a dual mandate of a steady rate of inflation and full employment. Which of these is the concern that the Fed has in this scenario?

4. If the Fed wants to address this issue, should it do something to lower interest rates or increase interest rates? What open market operation will the Fed need to conduct to change the interest rate?

Reference no: EM133446896

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