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Questions › IIT JAM › IIT JAM 2021 › Q42
1 markMacroeconomics › Inflation, unemployment and the Phillips curve › Okun's law and the output gapModerateabout 2 min

IIT JAM 2021 Question 42: Inflation, unemployment and the Phillips curve

Full employment output is 1 trillion Rupees and the natural rate of unemployment is 6%. If actual unemployment is 8%, then by Okun's law the absolute gap between full-employment output and actual output (in billion Rupees) is _______ (in integer).

Answer and worked solution

Answer: 40

Okun's law relates the output gap to the unemployment gap with a coefficient of about 222: the percentage output gap is 2(u−un)=2(8%−6%)=4%2(u - u_n) = 2(8\% - 6\%) = 4\%2(u−un​)=2(8%−6%)=4%.

Applied to full-employment output of 100010001000 billion, the gap is 0.04×1000=400.04 \times 1000 = 400.04×1000=40 billion. The answer is 404040.

Inflation, unemployment and the Phillips curve has come up 106 times in 7 exams since 2006.

What this question tests

This question is on Okun's law and the output gap, part of Inflation, unemployment and the Phillips curve in Macroeconomics.

The link between output growth and unemployment, and the gap between actual and potential output.

TestStop has 8 past-paper questions on this subtopic; the nearest in year are below.

  • IIT JAM 2022 · Q7From the following, who first examined the close negative relationship between the unemployment rate and the…
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