If full employment is defined by an unemployment rate of 5 percent,potential GDP can be estimated by multiplying
A) last year's GDP times 1.05.
B) the average output of the workforce times 95 percent.
C) the normal hours of work times last year's GDP times 100.
D) 95 percent of the labor force times the normal hours of work per year times the average output per hour of work.
E) the normal hours of work per year times the average output of the white-collar worker at the relevant time times 95.

Question

Quizplus · Accepted Answer

Potential GDP is the maximum amount of output an economy can produce with full employment. Full employment is usually defined as an unemployment rate of 5 percent. Therefore, potential GDP can be estimated by multiplying the total number of employed workers (which is 95 percent of the labor force) by the normal hours of work per year, and by the average output per hour of work. This yields D) 95 percent of the labor force times the normal hours of work per year times the average output per hour of work.

If Full Employment Is Defined by an Unemployment Rate of 5