In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 5 percent, then the output gap equals:
A)−1 percent.
B)−2 percent.
C)1 percent.
D)2 percent.

Question

Quizplus · Accepted Answer

Okun's law states that each extra percentage point of cyclical unemployment is associated with about a 2 percent widening of a negative output gap, measured in relation to potential output. In this case the economy is operating with one percent cyclical unemployment, so it has a −2 percent output gap.

In Macroland, Potential Output Equals $100 Trillion and the Natural