In Macroland,potential output equals $100 trillion and the natural rate of unemployment is 4%.If the actual unemployment rate is 3%,then the output gap equals

Question

Quizplus · Accepted Answer

The output gap is the difference between actual output and potential output.

Potential output = $100 trillion 
Natural rate of unemployment = 4%

With a 3% actual unemployment rate, the economy is producing above potential output (since the actual unemployment rate is below the natural rate of unemployment).

To calculate the output gap:

Output gap = (actual output - potential output) / potential output

Since the economy is operating above potential output, the output gap will be positive:

Output gap = (actual output - potential output) / potential output = (positive number)

Therefore, the only answer choice that is positive is (E) $2 trillion.

In Macroland,potential Output Equals $100 Trillion and the Natural Rate