Question

In Macroland, potential output equals $100 trillion and the natural rate of unemployment is 4 percent. If the actual unemployment rate is 5 percent, then real GDP must be:

A. $104 trillion.
B. $96 trillion.
C. $102 trillion.
D. $98 trillion.

Answer 1

The correct answer is D. $98 trillion.

Step-by-step explanation:

According to the question, the natural rate of unemployment in Macroland is 4 percent, while the actual unemployment rate is 5 percent. When the economy is at full employment, real GDP is equal to potential real GDP. Since the unemployment rate is above the natural rate, real GDP is less than potential.

In this case, the difference between the natural rate of unemployment and the actual unemployment rate is 1 percent (5% - 4%). Therefore, real GDP must be less than potential GDP by the same percentage. If potential GDP is $100 trillion, real GDP would be $99 trillion (100 trillion - 1%).

Therefore, the correct answer is D. $98 trillion.