Suppose the natural unemployment rate is 5 per cent, the actual unemployment rate is 6 per cent, and potential GDP is $500 billion. Based on Okun's Law, real GDP is equal to ________ billion.

Question

Quizplus · Accepted Answer

Okun's Law suggests that for every 1% increase in the unemployment rate above the natural rate, a country's GDP will be roughly an additional 2% lower than its potential GDP. Here, the actual unemployment rate is 1% higher than the natural rate (6% - 5% = 1%). Therefore, real GDP is 2% lower than potential GDP, which is 2% of $500 billion = $10 billion less. Thus, real GDP is $500 billion - $10 billion = $490 billion.

Suppose the Natural Unemployment Rate Is 5 Per Cent, the Actual