ECON 545 Week 6 Discussion; Monetary and Fiscal Policies

Week 6 Discussion Monetary and Fiscal Policies An economy is assumed to be operating at full capacity when its real GDP (what the economy produces) equals its potential GDP (what the economy would produce if all factors of production are used). When the economy is producing at full potential, everyone who wants to work can find a job, because every worker who enters the workforce will produce what he or she will eventually consume with the income. In addition, and when the economy is producing at full capacity, unemployment rates in the economy represent the natural rate of unemployment (only frictional and structural unemployment exists), which is also referred to as full employment. When the economy produces what it needs and consumes what it produces, the price level of the final goods and services and the price level of inputs (material and labor) will be at the same. In other words, the rate of change in the price level of goods and services will be equal to the rate of change in income (wages and return to inve