In Okunland, a country whose economy operates according to Okun's law, real GDP equals $7,520 billion, potential GDP equals $8,000 billion, and the actual unemployment rate is 8 percent. What is the natural rate of unemployment in Okunland?
A)2 percent
B)5 percent
C)6 percent
D)11 percent

Question

Quizplus · Accepted Answer

This problem applies Okun's law. Output is 6 percent below its potential because $7,520 billion/$8,000 billion = 0.94. Each percentage point of unemployment above its natural rate translates to a 2 percentage point negative output gap, so the unemployment rate must be 3 percentage points above the natural rate.

In Okunland, a Country Whose Economy Operates According to Okun's