Final answer:
According to Okun's Law, when cyclical unemployment is positive(option D), it suggests that the economy is not operating at full capacity and therefore the output gap is negative.
Step-by-step explanation:
According to Okun's Law, when cyclical unemployment is positive, this indicates that the economy is producing below its potential GDP. As such, the output gap is negative. A positive level of cyclical unemployment suggests that there are more people seeking work than there are jobs available due to the economy not operating at full capacity, or potential GDP.
When an economy is at or above potential GDP, cyclical unemployment tends to be zero as there is no deficit in demand for workers.This relationship in Okun's Law implies that when the economy is undergoing a downturn and producing less than its potential output, aggregate demand is insufficient to employ the full labor force, resulting in higher cyclical unemployment and a negative output gap.
To summarize, the correct option for what happens to the output gap when cyclical unemployment is positive is B. is negative.