In the fourth quarter of 1982, economic statistics showed the following:
Real GDP$5,189.8 billion Unemployment rate10.7% Inflation rate4.4%The conceptual variables corresponding to these data are:
Potential output$5,640.3 billion Natural rate of unemployment6.1% Ideal inflation rate1.0%?
a.Calculate the output gap in percentage points. Show your work. b.Calculate the unemployment gap in percentage points. Show your work. c.Calculate the inflation gap in percentage points. Show your work. d.Calculate the output loss and the inflation loss. Show your work. e.Calculate the total loss in the fourth quarter of 1982 if the weight on the inflation loss equals 2. Show your work. f.Calculate the total loss in the fourth quarter of 1982 if the weight on the inflation loss equals 6. Show your work.
What will be an ideal response?
| a. | Output gap = 100 × (5,189.8 ? 5,640.3)/5,640.3 = ?7.99% |
| b. | Unemployment gap = 10.7% ? 6.1% = 4.6% |
| c. | Inflation gap = 4.4% ? 1.0% = 3.4% |
| d. | Output loss = output gap squared = 63.84; inflation loss = inflation gap squared = 11.56 |
| e. | Loss = output loss + (weight × inflation loss) = 63.84 + (2 × 11.56) = 86.96 |
| f. | Loss = output loss + (weight × inflation loss) = 63.84 + (6 × 11.56) = 133.20 |
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