Assignment:
Part A. Unemployment and the GDP Gap
1. The US unemployment rate currently is 4 percent, while the natural rate of unemployment is 4.6 percent.
a. Is the economy in an expansion, a contraction, or neither? And is actual output (real GDP) greater, equal to, or less than potential output? Where is actual output compared to the trend line? Explain your answer.
b. How much of the (actual) unemployment is frictional and structural together? How much is cyclical? Explain your answer.
c. (i) Define the percentage GDP gap in general.
(ii) State mathematically the "Okun formula" (Okun's Law) for estimating the percentage GDP gap.
(iii) State Okun's Law in words.
d. (i) Compute the US current percentage GDP gap. Show your computation.
(ii) State your answer in words, comparing actual to potential output.
(iii)Is the US GDP gap positive or negative-and why?
2. In 2008, the unemployment rate was ten percent and the natural rate of unemployment six percent.
(i) What was the percentage GDP gap then? Show your computation.
(ii) State your answer in words, comparing actual to potential output.
(iii)What is the sign of the GDP gap then?
(iv)Why is the sign of the GDP gap in 2008 the opposite of the sign of the current GDP gap?
Part B. Inflation and Real GDP
3. In a hypothetical economy, the GDP deflator has the following values.
|
Year
|
GDP Deflator
|
|
2005
|
100
|
|
2017
|
118
|
|
2018
|
120
|
a. What is the annual inflation rate in 2018? Show your computation. [Hint: Round your answer to two decimal places.]
b. Nominal GDP in 2018 is $480 billion. What is real GDP (billions of 2005 dollars) in 2018? Show your computation.
Important: If you use symbols in your answers, be sure to define the symbols.
For example: nru = natural rate of unemployment.