Objective 3

Question 1

GDP Gap

Answer 1

The difference between actual output and potential output (full employment).

Question 2

Self-correcting mechanism

Answer 2

The natural tendency of an economy to return to full-employment without government intervention.

Question 3

Long-run equilibrium

Answer 3

The maximum sustainable output of a nation. The output of a nation that will naturally achieve.

Question 4

Efficiency wage model

Answer 4

The tendency for firms to pay wages above market equilibrium as a means to reduce costs associated with turnover.

Question 5

Natural rate of unemployment

Answer 5

The rate of unemployment when the economy is operating at potential output (full-employment). Frictional and structural employment are acceptable and natural in a market economy operating at full potential.

Question 6

Multiplier effect

Answer 6

The principle that an initial change in spending circulates and is thus “multiplied” to result in the total change in spending. The ratio of a change in GDP to an initial change in spending.