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:

Question

Quizplus · Accepted Answer

The output gap can be calculated by subtracting the natural rate of unemployment from the actual rate of unemployment and multiplying by potential output.

Output gap = (actual unemployment rate - natural unemployment rate) x potential output

Output gap = (0.03 - 0.04) x $100 trillion = -$1 trillion

Since the actual unemployment rate is below the natural rate, there is a positive output gap.

Real GDP = potential output - output gap = $100 trillion - (-$1 trillion) = $101 trillion

Therefore, the correct answer is (C) $101 trillion.

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