Suppose a country has 1 billion people.75 percent of its citizens are in the labor force,with 90 million unemployed.Full employment occurs at 2 percent.Based on this information,by what percentage has real output failed to reach its potential according to the revised Okun's Law?

Question

Quizplus · Accepted Answer

In this scenario, we can calculate the potential labor force as 0.75 billion (75% of 1 billion). Full employment occurs at 2 percent, which would mean that we should have no more than 15 million unemployed (2% of 0.75 billion). However, we currently have 90 million unemployed which is 75 million more than the full employment level. 
Using revised Okun's Law, we can calculate that the percentage by which real output has failed to reach its potential is equal to (unemployment gap / potential labor force) x 100. 
Therefore, the percentage would be (75 million / 0.75 billion) x 100 = 10%. So, the best choice is D, which means real output has failed to reach its potential by 10%.

Suppose a Country Has 1 Billion People