Suppose that the gap between potential GDP and actual GDP equals three times the difference between the natural rate of unemployment and the actual rate of unemployment. If the natural rate of unemployment is 5 percent, the actual rate is 6 percent, and real GDP equals $6,000, then potential GDP must equal

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Quizplus · Accepted Answer

The gap between potential GDP and actual GDP is calculated using Okun's Law, which states that for every 1% increase in the unemployment rate above the natural rate, GDP falls by about 2% of potential GDP. Here, the unemployment gap is 1% (6% - 5%), so the GDP gap is 3% (3 times the unemployment gap). Therefore, potential GDP is $6,000 / (1 - 0.03) = $6,185. However, the correct calculation should be $6,000 * (1 - 0.03) = $5,820.

Suppose That the Gap Between Potential GDP and Actual GDP