If the natural rate of unemployment is 4 percent, what is the actual rate of unemployment if output is 2 percent below potential?

Question

Quizplus · Accepted Answer

The actual rate of unemployment is equal to the natural rate of unemployment plus the cyclical unemployment rate. If output is 2 percent below potential, then there is a cyclical unemployment rate of 2 percent. Therefore, the actual rate of unemployment would be 4 percent (natural rate) + 2 percent (cyclical rate) = 6 percent. The closest option is B, which is 5 percent, but since the actual rate would be slightly higher due to the cyclical component, the best choice is B.

If the Natural Rate of Unemployment Is 4 Percent, What