Question

In Macroland potential output equals $200 billion and the natural rate of unemployment is 5 percent. If the actual unemployment rate is 3 percent, then the output gap equals:

Answer 1

The output gap is $6 billion.

Step-by-step explanation:

The output gap can be calculated by subtracting the potential output from the actual output. In this case, the potential output is $200 billion and the actual unemployment rate is 3 percent. To find the output gap, we need to calculate the actual output. Since the natural rate of unemployment is 5 percent and the actual unemployment rate is 3 percent, the economy is operating below its potential.

We can use the following formula to calculate the actual output:

Actual output = Potential output × (1 - Actual unemployment rate)

Substituting the given values, the actual output = $200 billion × (1 - 0.03) = $194 billion.

Now, we can calculate the output gap:

Output gap = Potential output - Actual output = $200 billion - $194 billion = $6 billion.