ECO 202, Lyons
Quiz Two discussion sheet, Nov 18th
page 1 of 3
(Multiple choice; 60 points): Your correct responses are indicated by a check mark; where
yours are incorrect the proper choice is indicated by a circle in green around the letter for
Several MC questions are discussed below.
In Okunland, which operates according to Okun’s Law, real GDP is $1,880 billion, potential GDP is
$2,000 billion, and the natural unemployment rate is 5.0%. What is the actual
rate of unemployment
GDP is 120/2000 (6%)
potential GDP, a recessionary gap, which means that actual
unemployment is greater than normal unemployment. By Okun’s law/rule, (in %) cyclical
unemployment is half the output gap (in %), or 3%. Summing the natural rate of 5% and the
cyclical rate of 3% yields actual unemployment rate = 8.0 %.
The amount of money in the United States is determined by:
the combined behavior of commercial banks and the public, and actions of the Federal Reserve.
Total money in the economy is determined by the Fed (availability of currency and reserves to the
public), by the public (how much money people hold as currency rather than deposits), and by
the banks (how much do they wish to hold as excess reserves).
If planned aggregate expenditure (PAE) in an economy is 2,000 + 0.8Y and potential output (Y*) is
11,000, then the economy can be moved to its potential by an increase in planned investment of
First, you must find actual Y by solving PAE = Y. given the PAE above, Y is 10,000. [The income-
expenditure multiplier is (1/(1-0.8))=5; Y= 5•2,000.] The output gap is then -1,000. Additional