Potential GDP has been calculated to equal $5,265 billion (B) the total labor fo

Question

Potential GDP has been calculated to equal $5,265 billion (B) the total labor force is $140 million persons; (C) Total unemployment has risen to 15 million persons, including (I) frictionally unemployed: 3 million persons, (II) structurally unemployed: 2 million and (III) the balance is cyclically employed What is (X) The actual GDP _____ and (Y) The GDP gap_______? If all the information Seth forth above remains the same but the total labor force shrinks to 130 million persons because 10 million have become discouraged and therefore left the workforce and are not seeking employment. Would you expect the GDP gap to be (X) the same as ______, (Y) less than _______, or (Z) more than________ the GDP gap

Explanation / Answer

From the Okuns Law we have: (Y-Y*)/Y* = b(u-u*)

The GDP gap :

(Y-Y*)/Y* = 2(u-u*) = 2(10/140) = 0.14

(Y-5265)/5265 = 2(u-u*) = 2(10/140) = 0.14

Y -5265= (2/14)*5265 = 751.714

Y = 5265+751.714

Y= 6016.71 billion.

GDP gap = 751.714 billion.

New  total labor force shrinks to 130 million

(u-u*) = 10/130

The GDP gap (Y-Y*)/Y* = b(10/130) = 2/13 = 0.15

Thus the GDP gap is more than the GDP gap as before.

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