The equilibrium unemployment rate is 4%, and the economy is producing 95% of its potential output. Okun's law predicts an unemployment rate of _____.

Question

Quizplus · Accepted Answer

Okun's law suggests that for every 1% increase in output above potential output, the unemployment rate will decrease by 0.5%. Therefore, since the actual output is 5% below potential output (100%-95%), the unemployment rate will be higher by 2.5% (0.5% increase for every 1% below potential output). Thus, the predicted unemployment rate would be 6.5% (4% + 2.5%).

The Equilibrium Unemployment Rate Is 4%, and the Economy Is