Answer:
a. 18 percent
b. $90 billion
Step-by-step explanation:
a. Calculation to use Okun's law to determine the size of the GDP gap in percentage-point terms.
First step is to find the difference between ACTUAL RATE of unemployment and NATURAL RATE of unemployment
Difference=13%-4%
Difference= 9%
Based on the information above calculation we can see that the ACTUAL RATE of unemployment EXCEEDS the NATURAL RATE of unemployment by 9%, which indicates a CYCLICAL UNEMPLOYMENT.
Thus, According to Okun's law, this translates into an 18 % GDP gap in percentage-point terms (= 2 × 9%).
Therefore the the size of the GDP gap in percentage-point terms is 18 percent
b. Calculation to determine how much output is forgone because of cyclical unemployment
Forgone Output :
By applying Okun’s law we known that the GDP gap is 18%, which means that we are 18% below the GDP amount which is given as $500 billion,
Hence,
Output forgone = (18/100) ×$500 billion
Output forgone=0.18×$500 billion
Output forgone=$90 billion
Therefore the Forgone Output is $90 billion
