Explain what determines potential GDP.
Potential GDP is the quantity of real GDP that the full-employment quantity of labor produces.
The production function describes the relationship between real GDP and the quantity of labor employed when all other influences on production remain the same. As the quantity of labor increases, real GDP increases.
The quantity of labor demanded increases as the real wage rate falls, other things remaining the same.
The quantity of labor supplied increases as the real wage rate rises, other things remaining the same.
At full-employment equilibrium, the real wage rate makes the quantity of labor demanded equal the quantity of labor supplied.
Explain what determines the natural unemployment ...