Question

Assume that in the first quarter of 2020, real GDP and potential GDP were both $20 trillion and the unemployment rate was 3.5%. Assume that potential GDP is still $20 trillion in the second of 2020 but that actual real GDP is $19 trillion.

a. What is the annualized growth rate of real GDP between the first and second quarters?

b. What is the output gap in the second quarter of 2020?

c. According to Okun’s law, what will be the unemployment rate in the second quarter of 2020?

d. Assume that in the second quarter consumption is equal $13 trillion, net exports are equal to -$0.5 trillion, and government purchases and planned investment are both equal to $3 trillion. What is the amount of inventory investment?

Answer 1

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Question:

Answer:

a). Answer:

Annualized growth rate of real GDP between the first and second quarters:

First quarter of 2020, real GDP = $20 trillion

Second quarter of 2020, real GDP = $19 trillion

Growth rate between the first and second quarters = [(Current year real GDP- Previous year real GDP)/Previous year real GDP] *100

= [(19 - 20)/20] * 100

= -(1/20) *100

= -0.05 *100 = -5%

Growth rate between the first and second quarters = -5%

GDP growth rate is negative and reduced by 5%.

b). Answer:

Output Gap = [(Y–Yp)/Yp] *100

Where,

Y - Actual output

Yp - Potential output.

Output Gap = [(19 - 20)/20]*100

= (-1/20) *100

= 0.05 * 100 = -5%

Output Gap = 5% (negative value)

Output gap is negative and it is 5%.

c). Answer:

According to Okun’s law when unemployment goes up by 1%, GDP drops by 2%.

unemployment rate in first quater of 2020 = 3.5%

Growth rate between the first and second quarters = -5% (calculated in in the question number "a".)

According to Okun’s law unemployment = 3 + (1/2)*5

= 3 + 2.5 = 5.5%

According to Okun’s law unemployment = 5.5%

d). Answer:

GDP = $19 trillion

Consumption is= $13 trillion

Net exports = -$0.5 trillion

Government purchases + Planned investment = $3 trillion.

Inventory investment = ?

Y = C+I+G+NX

Where,

C = Consumption

I = Investment

G = Government spending

NX = Net export.

19 = 13 + I + 3 + (-0.5)

I = 3.5

Inventory investment = $3.5 trillion.- $3 trillion= $0.5 trillion

Thank You