Suppose that an economy suffering with unemployment 1 point above its natural rate of 6 percent were growing at 2 percent per year. If potential GDP were growing at 3 percent, what would the unemployment rate equal in one year's time?

Question

Quizplus · Accepted Answer

The economy's current unemployment rate is 1 point above its natural rate, making it 7 percent. Since the economy is growing at 2 percent per year but potential GDP is growing at 3 percent, the gap between actual and potential GDP is increasing. This implies that unemployment will rise. However, the exact rate depends on the relationship between GDP growth and unemployment, often conceptualized through Okun's Law. Without specific figures from Okun's Law, a precise calculation is challenging, but given the options and the scenario, a slight increase to 6.33 percent reflects a modest worsening of unemployment due to slower growth than potential GDP growth.

Suppose That an Economy Suffering with Unemployment 1 Point Above