Question

In Macroland, potential output equals exist100 trillion and the natural rate of unemployment is 4 percent.

(a) If the actual unemployment rate is 5 percent, then the output gap equals:
(b) If the actual unemployment rate is 3 percent, then the output gap equals

Answer 1

Answer:

GDP gap =  -2 %

GDP gap = 2%

Explanation:

given data

potential output = 100 trillion

natural rate unemployment = 4 percent

solution

we know as per the Okun's law

the GDP gap will be =  -2%  ( for every 1% )

the actual unemployment rate exceeds its natural rate

so here  if actual unemployment rate = 5 %

GDP gap will be

GDP = ( 5% -  4% ) × -2

GDP gap =  -2 %

and

when  actual unemployment rate = 3%

so GDP will be

GDP gap = ( 3% -  4% ) × -2

GDP gap = 2%