The natural rate of unemployment is 4%, and the economy is producing 95% of its potential output. Okun's law predicts an unemployment rate of _____%.

Question

Quizplus · Accepted Answer

Okun's law states that for every 1% increase in the output gap (the difference between actual and potential output), there will be a 0.5% decrease in the unemployment rate. Since the output gap is currently at -5% (100% - 95%), the predicted increase in the unemployment rate would be 2.5%. Adding this to the natural rate of unemployment (4%) gives us a predicted unemployment rate of 6.5%. Therefore, the correct answer is choice C.

The Natural Rate of Unemployment Is 4%, and the Economy