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Chris M., M.S.W. Social Work

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Use Okun's law to determine the size of the GDP gap

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Assume the following data for a country: total population, 500; population under 16 years of age or institutionalized, 120; not in labor force, 150; unemployed, 23; part-time workers looking for full-time jobs, 10. What is the size of the labor force? What is the official unemployment rate? 3. Suppose that the natural rate of unemployment in a particular year is 5 percent and the actual rate of unemployment is 9 percent. Use Okun's law to determine the size of the GDP gap in percentage-point terms. If the potential GDP is $500 billion in that year, how much output is being forgone because of cyclical unemployment? 4. If the CPI was 110 last year and is 121 this year, what is this year's rate of inflation? In contrast, suppose that the CPI was 110 last year and is 108 this year. What is this year's rate of inflation? What term do economists use to describe this second outcome? 6. If your nominal income rose by 5.3 percent and the price level rose by 3.8 percent in some year, by what percentage would your real income (approximately) increase? If your nominal income rose by 2.8 percent and your real income rose by 1.1 percent in some year, what must have been the (approximate) rate of inflation?

Assume that the consumption schedule for a private open economy is such that consumption C = 50 + 0.8Y. Assume further that planned investment I_{g} and net exports X_{n} are independent of the level of real GDP and constant at I_{g} = 30 and X_{n} = 10. Recall also that, in equilibrium, the real output produced (Y) is equal to aggregate expenditures: Y = C + I_{g}+ X_{n}

a. Calculate the equilibrium level of income or real GDP for this economy.

b. What happens to equilibrium Y if I_{g} changes to 10? What does this outcome reveal about the size of the multiplier?

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