Question

In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 3 percent, then the output gap equals:

A. 1 percent.
B. 2 percent.
C. -2 percent.
D. -1 percent

Answer 1

The output gap is -1 percent

Step-by-step explanation:

The output gap measures the difference between actual output and potential output in an economy. It is calculated as the difference between the actual unemployment rate and the natural rate of unemployment.

In this case, the actual unemployment rate is 3 percent, while the natural rate of unemployment is 4 percent. To calculate the output gap, we subtract the natural rate of unemployment from the actual unemployment rate: 3% - 4% = -1%.

Therefore, the output gap in Macroland is -1 percent, which means that the economy is operating below its potential output.