There are three leading economic indicators, Economic Growth rate (%∆ in Real Gross Domestic Product or %∆RGDP), Inflation Rate (%∆CPI), and Unemployment Rate (U). The target for US Economy is to be at Full Employment. Historically data suggests that US Economy is at Full Employment when the following data prevails:
%∆RGDP around…3%
%∆CPI (Inflation Rate)… between 1% and 2%
U = Natural Unemployment Rate = Frictional U + Structural U = between 4.5% and 5.5% Unemployment Rate.
Based on the above information, answer the following two questions, your answers should be as detailed as possible:
1. Assess the state of the Economy: Are we at full employment? Are we in danger of a recession or already in a recession? Should we worry about inflation? Stagflation? What should be our main economic concern?
2. Recommend an Economic Policy. Suggest a Fiscal Policy, Monetary Policy or a combination of them to deal with the problem, if there is a problem. You are free to use any economic policy, including Classical, Neo-Classical, Monetarist and Keynesian policies.
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