In Macroland,potential output equals $100 billion and the natural rate of unemployment is 5%.If the actual unemployment rate is 3%,then the output gap equals

Question

Quizplus · Accepted Answer

The output gap can be calculated using Okun's Law, which states that for every 1% decrease in the unemployment rate below the natural rate, GDP increases by about 2%. Here, the unemployment rate is 2% below the natural rate (5% - 3%), so the output gap is 2% * 2 = 4% of potential output. 4% of $100 billion is $4 billion, indicating a positive output gap of $4 billion.

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