$$\begin{array} { | l | c | }
\hline \text { Potential Real GDP } & \$ 200 \text { Billion } \
\hline \text { Natural Rate of Unemployment } & 6 \% \
\hline \text { Actual Rate of Unemployment } & 12 \% \
\hline
\end{array}$$ Refer to the accompanying data, which is for a speci?c year in a hypothetical economy for which Okun's law is applicable. If the unemployment rate in the economy fell to 6 percent, we could
Conclude that
A) only structural unemployment remained.
B) the economy's production possibilities curve shifted outward.
C) the economy had moved from a point inside its production possibilities curve to a point on or very near the curve.
D) nominal GDP would rise, but real GDP would fall.

Question

$$\begin{array} { | l | c | } 
\hline \text { Potential Real GDP } & \$ 200 \text { Billion } \
\hline \text { Natural Rate of Unemployment } & 6 \% \
\hline \text { Actual Rate of Unemployment } & 12 \% \
\hline
\end{array}$$ Refer to the accompanying data, which is for a speci?c year in a hypothetical economy for which Okun's law is applicable. If the unemployment rate in the economy fell to 6 percent, we could
Conclude that
A) only structural unemployment remained.
B) the economy's production possibilities curve shifted outward.
C) the economy had moved from a point inside its production possibilities curve to a point on or very near the curve.
D) nominal GDP would rise, but real GDP would fall.

Quizplus · Accepted Answer

Okun's law states that for every 1% decline in the unemployment rate, real GDP will increase by 2% above its potential level. In this case, the actual rate of unemployment is 12% and the natural rate of unemployment is 6%. This means that there is 6% of cyclical unemployment in the economy.

If the unemployment rate fell to 6%, this would mean that there is no more cyclical unemployment in the economy, and only structural and frictional unemployment would remain. This would also mean that the economy has moved from a point inside its production possibilities curve to a point on or near the curve. Therefore, the best choice is C.

Choice A is not correct because structural unemployment is a type of unemployment that exists regardless of the level of GDP, and reducing cyclical unemployment would not eliminate it.

Choice B is not correct because Okun's law does not refer to shifts in the production possibilities curve, but rather movement along the curve.

Choice D is not correct because nominal GDP would increase due to a decrease in unemployment, but real GDP would also increase due to the fact that the economy is now producing at its potential level.

Refer to the Accompanying Data, Which Is for a Speci?c