Question 1

The economy of Alpha operates according to Okun's law. In Alpha, potential GDP equals $500 billion, actual GDP equals $480 billion, and the natural rate of unemployment is 5 percent. What is the actual rate of unemployment in Alpha?

Accepted Answer

Alpha's potential GDP is $500 billion, but actual GDP is 4 percent less than this because ($480 billion/ $500 billion)− 1 = −0.04. Using Okun's law, a 4 percent negative output gap means that actual unemployment is 2 percentage points higher than the natural rate of 5 percent.

Question 2

The economy of Omega operates according to Okun's law. In Omega, the actual and the natural rates of unemployment equal 5 percent, and real GDP equals $10 trillion. What is potential GDP in Omega?

Accepted Answer

Since the actual rate of unemployment in Omega equals the natural rate of unemployment, the economy is operating at its potential, so potential GDP is $10.0 trillion.

Question 3

If all prices adjusted immediately to balance the quantities supplied and demanded for all goods and services:

Accepted Answer

If prices adjusted immediately for all goods and services, inventories would stay at their desired level and output gaps would not exist.

Question 4

According to Okun's law, when cyclical unemployment is negative, the output gap:

Accepted Answer

When cyclical unemployment is negative the economy is performing above its potential and the output gap is positive.

Question 5

If firms maintain preset prices in the short run, then the primary cause of output gaps is changes in:

Accepted Answer

Economy-wide spending, or ''aggregate demand,'' changes as expectations and conditions change. If prices are fixed these demand changes create output gaps.

Question 6

The economy of Omega operates according to Okun's law. In Omega, potential GDP and real GDP both equal $7 trillion, and the natural rate of unemployment equals 6 percent. What is the actual rate of unemployment in Omega?

Accepted Answer

Since the economy of Omega is operating at its potential, the actual rate of unemployment equals the natural rate of unemployment, so the unemployment rate must be 6.0 percent.

Question 7

According to Okun's law, when cyclical unemployment is positive, the output gap:

Accepted Answer

When cyclical unemployment is positive the output gap is negative because the actual unemployment rate exceeds the natural unemployment rate.

Question 8

Contrary to behavior that would be required to eliminate output gaps, many firms in the economy:

Accepted Answer

Prices are "sticky" in many cases, which reduces the economy's ability to adapt to changing demand conditions.

Question 9

In Macroland, a country whose economy operates according to Okun's law, potential GDP equals $10 trillion, the actual rate of unemployment is 8 percent, and the natural unemployment rate is 6 percent. What is real actual GDP in Macroland?

Accepted Answer

This problem applies Okun's law. Actual unemployment is 2 percentage points above the natural rate. This results in a 4 percent negative output gap. Since GDP potential is $10 trillion, actual GDP is 96 percent of this, or $9.6 trillion.

Question 10

Varying the quantity of output produced and sold at preset prices is called:

Accepted Answer

Rather than changing prices with every variation in demand, firms tend to adjust in the short run by varying the quantity of output produced and sold. This behavior is known as meeting demand.

Question 11

If real GDP is less than potential GDP, then:

Accepted Answer

If real GDP is less than potential GDP, there is a recessionary output gap and the actual unemployment rate exceeds the natural rate of unemployment.

Question 12

According to Okun's law, when the output gap is negative, cyclical unemployment:

Accepted Answer

When the output gap is negative, cyclical unemployment is positive because the actual unemployment rate exceeds the natural unemployment rate.

Question 13

If real GDP is greater than potential GDP, then:

Accepted Answer

If real GDP exceeds potential GDP, there is an expansionary output gap and the actual unemployment rate is lower than the natural rate of unemployment.

Question 14

If actual GDP equals potential GDP, then:

Accepted Answer

If actual GDP equals potential GDP, there are no output gaps and the economy is at full employment.

Question 15

The economy of Alpha operates according to Okun's law. In Alpha, potential GDP equals $500 billion, actual GDP equals $520 billion, and the natural rate of unemployment is 5 percent. What is the actual rate of unemployment in Alpha?

Accepted Answer

Alpha's potential GDP is $500 billion, but actual GDP is 4 percent more than this because ($520 billion/ $500 billion)− 1 = 0.04. Using Okun's law, a 4 percent positive output gap means that actual unemployment is 2 percentage points lower than the natural rate of 5 percent.

Question 16

In Okunland, a country whose economy operates according to Okun's law, real GDP equals $7,520 billion, potential GDP equals $8,000 billion, and the actual unemployment rate is 8 percent. What is the natural rate of unemployment in Okunland?

Accepted Answer

This problem applies Okun's law. Output is 6 percent below its potential because $7,520 billion/$8,000 billion = 0.94. Each percentage point of unemployment above its natural rate translates to a 2 percentage point negative output gap, so the unemployment rate must be 3 percentage points above the natural rate.

Question 17

The economy of Omega operates according to Okun's law. In Omega, the actual and the natural rates of unemployment both equal 5 percent, and potential GDP equals $10 trillion. What is real GDP in Omega?

Accepted Answer

Since the actual rate of unemployment in Omega equals the natural rate of unemployment, the economy is operating at its potential, so real GDP is $10.0 trillion.

Question 18

According to Okun's law, when the output gap is positive, cyclical unemployment:

Accepted Answer

When the output gap is positive, cyclical unemployment is negative because the actual unemployment rate is less than the natural unemployment rate.

Question 19

In the long run, output gaps are eliminated by:

Accepted Answer

As households and businesses change buying patterns, prices eventually must change to reflect the new demand for output.

Question 20

If the actual rate of unemployment equals the natural rate of unemployment, then:

Accepted Answer

If the actual rate of unemployment equals the natural rate of unemployment, there are no output gaps and the economy is operating at its potential GDP.

Quiz 24: Short-Term Economic Fluctuations: An Introduction