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POTENTIAL REAL GROSS DOMESTIC PRODUCT: The total real output (real gross domestic product) that the economy could produce if resources are fully employed. In other words, the economy is operating ON the production possibilities frontier. Full employment is generally indicated by achieving what is termed the natural unemployment rate, which is an unemployment rate in the neighborhood of about 5%. If the economy is at full employment then actual gross domestic product is equal to potential gross domestic product and the actual unemployment rate is equal to the natural unemployment rate. The macroeconomy is thus living up to its potential, at least in terms of producing wants-and-needs satisfying goods and services.

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Lesson 11: Circular Flow | Unit 3: Government Page: 15 of 22

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  • The role the government sector plays in the economy and the circular flow through taxes and spending.
  • How taxes divert household sector income to the government sector to pay for government purchases.
  • That with the government sector included, the circular flow highlights the three basic uses of national income: consumption, saving, and taxes.
  • Why government spending is divided into government purchases of GDP and transfer payments.
  • Why the circular flow is interested in the net tax flow (taxes minus transfer payments) from households to government.
  • When government does not collect enough taxes to pay for purchases, it can borrow through the financial markets.
  • The Federal deficit, which is the borrowing by the federal government to make up the difference between taxes and spending.
  • That federal borrowing is combined with state and local borrowing (or saving) for total government borrowing.
  • Why the government sector diverts part of the circular flow, but does not necessarily change the total amount of GDP.

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LONG-RUN TREND

The pattern of potential real gross domestic product of an economy based on full employment of available resources. The long-run trend is commonly represented as a positively-sloped line in a diagram depicting business-cycle phases. This slope captures the economy's expansion in its production possibilities resulting from increases in the quantity and quality of resources.

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Today, you are likely to spend a great deal of time watching the shopping channel looking to buy either a three-hole paper punch or decorative picture frames. Be on the lookout for door-to-door salesmen.
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NDP
Net Domestic Product
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