Measuring Yt and Y ~ t : A real-world problem faced by policymakers, forecasters, and businesses every day is how to judge the state of the economy. Consider the table below, showing hypothetical measures of real GDP for each quarter (three-month period) in the coming years, starting at a level of $25.0 trillion in 2023Q1 (the first quarter of 2023). Actual Potential Short-run Growth rate output output output of actual Year Yt Yt Yt − Yt ~ Yt output %DY 2023Q1 25.00 2023Q2 25.20 2023Q3 25.40 2023Q4 25.30 2024Q1 25.20 2024Q2 25.15 2024Q3 25.13 2024Q4 25.30 2025Q1 25.50 2025Q2 26.00 2025Q3 26.80 2025Q4 27.10 Now fill in the remaining columns of the table by answering the following questions.

(a) What is potential output in 2023Q1? You could call this a trick question, since there’s no way for you to know the answer! In a way, that’s the main point: fundamentally, we have to take some other measurements and make some assumptions. Suppose your research assistant tells you that in 2023Q1, business surveys, unemployment reports, and recent years’ experience suggest that the economy is operating at potential output, equal to $25.0 trillion. So go ahead and write 25.0 for potential in this year.

(b) Assume potential output grows at a constant annual rate of 2.5%, and complete the remainder of the table. Hint: What is the growth rate in each quarter

(c) Comment on the state of the economy in each year. When does the economy enter a recession? When does the recession end?

(d) How is your answer in part

(c) related to the growth rate of actual output in the last column of the table?