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 real GDP equals:
A)$97 trillion.
B)$98 trillion.
C)$101 trillion.
D)$102 trillion.

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 −1 percent cyclical unemployment, so it has a +2 percent output gap. One hundred two percent of $100 trillion is $102 trillion.

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