Question 1

At the economy's natural rate of unemployment:

Accepted Answer

The natural rate of unemployment is also known as the non-accelerating inflation rate of unemployment (NAIRU) and represents the rate of unemployment consistent with stable inflation. At this rate, the economy is operating at its potential output level and there is little cyclical unemployment. While some frictional unemployment may exist, it is not the only source of unemployment at this level. Therefore, choice A is the best answer as it represents the most accurate description of the economy at the natural rate of unemployment.

Question 2

Okun's law:

Accepted Answer

Okun's law shows the relationship between the unemployment rate and the size of the GDP gap. It states that for every 1% increase in unemployment above the natural rate, there is a 2% decrease in the GDP (or a 2% increase in the GDP gap). Therefore, it measures the extent to which changes in the unemployment rate affect economic output.

Question 3

When the unemployment rate is relatively high, we can conclude that:

Accepted Answer

When unemployment is relatively high, it means that there is a lack of demand for labor in the economy which indicates that the actual GDP is lower than the potential GDP. Hence, potential GDP is in excess of actual GDP.

Question 4

The natural rate of unemployment:

Accepted Answer

The natural rate of unemployment may change from one decade to another due to structural changes in the economy, changes in demographics, and other factors. It is not fixed over time, nor is it found by adding the cyclical and structural unemployment rates. While the natural rate of unemployment cannot be eliminated through public policy, it can be influenced by policies that affect the structural and frictional unemployment rates.

Question 5

The GDP gap measures the:

Accepted Answer

The GDP gap measures the amount by which potential GDP exceeds actual GDP, which is option B. Option A is incorrect because NDI (Net Domestic Income) is not a commonly used economic variable. Option C is incorrect because actual GDP cannot exceed NDI as NDI is a component of GDP itself. Option D is incorrect because the difference between nominal GDP and real GDP is commonly referred to as the GDP deflator, which is different from the concept of the GDP gap.

Question 6

The Canadian economy is said to be producing its non-inflationary potential level of GDP when the natural rate of unemployment is:

Accepted Answer

The natural rate of unemployment is the level of unemployment that exists when the economy is producing its potential level of GDP. While the exact natural rate may vary over time, estimates typically range from 4-6%. Therefore, option C is the most realistic choice as it falls within this range. Options A and B are too high and would suggest that the economy is producing below its potential level of GDP, while option D is too low and would suggest an overheating of the economy.

Question 7

Assume the natural rate of unemployment in the Canadian economy is 7 percent and the actual rate of unemployment is 9 percent.According to Okun's law, the GDP gap:

Accepted Answer

Okun's law states that the GDP gap is equal to the difference between the actual unemployment rate and the natural unemployment rate multiplied by 2. In this case, the GDP gap is equal to (9% - 7%) * 2 = 4%.

Question 8

The natural rate of unemployment is the:

Accepted Answer

The natural rate of unemployment is the full-employment unemployment rate, which is the lowest rate of unemployment that can be sustained by the economy without causing inflation. This is sometimes also called the non-accelerating inflation rate of unemployment (NAIRU). It is determined by factors such as the level of technology, the structure of the labor market, and demographic characteristics.

Question 9

The relationship between the size of the GDP gap and the unemployment rate is:

Accepted Answer

The GDP gap is the difference between the actual GDP and the potential GDP. The unemployment rate is the percentage of the labor force that is unemployed. When the GDP gap is positive, the economy is producing more than its potential output and the unemployment rate is low. When the GDP gap is negative, the economy is producing less than its potential output and the unemployment rate is high.

Question 10

Full-employment output is also called:

Accepted Answer

Full-employment output is also referred to as potential output, which is the level of output that can be sustained in the long run without putting upward or downward pressure on inflation. It is the level of output where there is no cyclical unemployment or output gap, and all resources are being used at their optimal level. Therefore, the best choice is C.

Question 11

The following information is for a specific year in a hypothetical economy for which Okun's law is applicable: Potential Real GDP = $200 billion
Natural rate of unemployment = 6 percent
Actual rate of unemployment = 12 percent
The amount of output being forgone by the above economy is:

Accepted Answer

Okun's law states that for every 1% increase in the unemployment rate above the natural rate, a country's GDP will be roughly an additional 2% lower than its potential GDP. The unemployment rate is 6% above the natural rate (12% - 6%), so the GDP is 12% below potential. 12% of $200 billion is $24 billion.

Question 12

If the actual GDP is less than potential GDP:

Accepted Answer

If the actual GDP is less than potential GDP, it means that there is a recessionary gap, which implies that there are unused resources and that the actual unemployment rate is higher than the natural unemployment rate. This is because businesses are not producing at their full potential, which leads to layoffs and higher unemployment. However, this situation does not necessarily lead to a fall in potential GDP, a rise in the price level, or a fall in investment spending.

Question 13

In an economy nominal GDP is $4,000 billion.The actual unemployment rate is 8 percent and the natural rate of unemployment is 6 percent.According to Okun's law there will be:

Accepted Answer

Okun's law states that for every 1 percentage point above the natural rate of unemployment, there is a 2-3% loss in potential GDP. In this case, the unemployment rate is 2 percentage points above the natural rate (8% - 6% = 2%). Therefore, the potential loss in GDP would be 2% * 4,000 billion = $80 billion.

Question 14

When the Canadian economy has achieved "full employment," the unemployment rate is at or below:

Accepted Answer

The answer of When the Canadian economy has achieved "full...

Question 15

If the natural rate of unemployment is 6 percent and the actual unemployment rate is 9 percent, then Okun's law indicates that the GDP gap is:

Accepted Answer

The answer of If the natural rate of unemployment is...

Question 16

Okun's law indicates that for:

Accepted Answer

Okun's law states that for every 1 percent that the actual unemployment rate exceeds the natural unemployment rate, there is a generated 2 percent GDP gap. Therefore, option A is the correct answer. Option B, C, and D are incorrect as they do not accurately represent Okun's law.

Question 17

If the natural rate of unemployment was 7 percent, the current unemployment rate was 12 percent, and the nominal GDP was $4,000 billion, then according to Okun's law the economy would have sacrificed:

Accepted Answer

According to Okun's law, for every 1% increase in the unemployment rate above the natural rate, a country's GDP will be roughly an additional 2% lower than its potential GDP. The unemployment rate is 5% above the natural rate (12% - 7%), so the economy sacrifices 10% of potential GDP (5% * 2%). Therefore, 10% of $4,000 billion is $400 billion.

Question 18

For every 1 percent that the actual unemployment rate exceeds the natural rate, there is generated a 2 percent GDP gap.This is a statement of:

Accepted Answer

This statement is known as Okun's law, which suggests that there is a negative relationship between unemployment and GDP. For every 1 percent increase in unemployment above the natural rate, there will be a 2 percent decrease in GDP.

Question 19

The aggregate cost of unemployment can be measured by the:

Accepted Answer

Potential GDP represents the maximum output that an economy can produce at full employment. If actual GDP is less than potential GDP, then there is a gap known as the output gap, which represents the lost output due to unemployment. Therefore, the aggregate cost of unemployment can be measured by the amount by which potential GDP exceeds actual GDP.

Question 20

A large negative GDP gap implies:

Accepted Answer

A large negative GDP gap implies that the actual GDP is significantly lower than the potential GDP, which means that the economy is operating below its full capacity. This typically leads to high unemployment rates, as firms do not need to hire as many workers when they are producing below capacity.

Quiz 9: B: Business Cycles, Unemployment, and Inflation