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

GDP gap = -2 %

GDP gap = 2%

Step-by-step 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%