Suppose potential GDP is $100 billion and the natural unemployment rate is 5 percent. If the unemployment rate is 6 percent, then according to Okun's Law real GDP is
A)$102 billion.
B)$98 billion.
C)$100 billion.
D)$101 billion.
E)$99 billion.

Question

Quizplus · Accepted Answer

Okun's Law states that a 1 percentage point increase in the unemployment rate is associated with a 2 percentage point decrease in real GDP. Therefore, if the unemployment rate is 6 percent, then real GDP is 2 percentage points below potential GDP, which is $100 billion. Therefore, real GDP is $98 billion.

Suppose Potential GDP Is $100 Billion and the Natural Unemployment