Question

43) Suppose potential GDP is $100 billion and the natural unemployment rate is 5 percent. If the unemployment rate is 6 percent, then according to Okun's Law real GDP is

A) $98 billion

. B) $101 billion.

C) $99 billion.

D) $102 billion.

E) $100 billion.

44) If the price level is 100 in one year and rises to 102 the next year, then the inflation rate is

A) 2.0 percent.

B) 0.02 percent.

C) 102 percent.

D) 100 percent.

E) unable to be determined without knowing potential GDP.

45) The fraction of a change in disposable income that is spent on consumption is the

A) marginal propensity to consume.

B) marginal buying power of money.

C) expected future disposable income.

D) marginal dissaving ratio

. E) marginal propensity to dissave.

Answer 1

43. $102 billion

Reason: Output gap = 2 (unemployment gap)

GDP - Potential GDP = 2(6-5)

Real GDP = 102

44. 2 percent

Reason: Inflation = [(102-100)/100 ] x 100 = 2%

45. Marginal propensity to consume

Reason: It is the fraction by which C increases as GDP increases