Final answer:
The natural rate of unemployment is the sum of frictional and structural unemployment, which totals 7 percent in this case. The presence of negative cyclical unemployment does not change the natural rate calculation. Hence, the correct answer is D. 7%.
Step-by-step explanation:
If there is 3 percent frictional unemployment, 4 percent structural unemployment, and -2 percent cyclical unemployment, then the natural rate of unemployment equals:
The natural rate of unemployment is the sum of frictional and structural unemployment. It does not include cyclical unemployment. Therefore, to calculate the natural rate of unemployment, we simply add frictional unemployment to structural unemployment. In this case, 3 percent (frictional) plus 4 percent (structural) equals 7 percent.
However, the presence of negative cyclical unemployment indicates that the economy is producing above potential GDP, which can temporarily reduce the observed unemployment rate below the natural rate. This does not change the calculation of the natural rate itself. Therefore, the correct option is D. 7%.