HM 5 1. What will happen to the potential gap? Where would you say the economy is likely to be in the business cycle in two years? 2. If the Okun parameter is 1½%, what will happen to the unemployment rate? 3. What might be expected to happen to inflation and why? Scenario A: Assume potential growth is 2%, the natural rate of unemployment is 5%, and the potential gap is -1.5% initially. Also note that core inflation initially is running at 1½% and the unemployment rate is 6%. If the economy grows at 3% over the next two years… Scenario B: Assume potential growth is 2%, the natural rate of unemployment is 5%, and the potential gap is +1½% initially. Also note that core inflation initially is running at 3½% and the unemployment rate is 4%. If the economy falls into recession and declines by 2% over the next two years… Scenario C: Assume potential growth is 2%, the natural rate of unemployment is 5%, and the potential gap is 0% initially. Also note that core inflation initially is running at 1½% and the unemployment rate is 5%. If the economy grows at 2% over the next two years… Write a Discussion: What are leading indicators of recession currently telling us about the economy? Do you think renewed recession is a major risk at this time?
