When Professor Robert Gordon lowered his estimate of the target unemployment rate from 6 percent to
5.5 percent in early 1995, he quipped, "I've just created 600,000 jobs."
a. What events in the 1990s most likely motivated his revision of the target unemployment rate?
b. Show the effect this revision would have on the AS/AD model.
c. The unemployment rate at the time of the revision was 5.5 percent. Income was $7.3 trillion. Within 18 months the unemployment rate had fallen to 5 percent without signs of accelerating inflation. How much higher would the level of potential income have been in 1995 if the target unemployment rate were 5 percent rather than 5.5 percent?