Problem 1:
A. Describe what happens to the natural rate of unemployment and potential GDP if cyclical unemployment rises to 3 percent with other types of unemployment unchanged.
B. Describe what happens in the natural rate of unemployment and potential GDP if structural unemployment fails to 1.5 percent with other types of unemployment unchanged.
Problem 2. Self-correction is the ability of the economy to eliminate any imbalances between actual and potential output. Using an aggregate supply and aggregate demand, show why this self-correction process involves only temporary periods of inflation or deflation.
Problem 3. What are three factors that can change the economy's potential output? What is the impact of shifts of the aggregate demand curve on potential output?