Assume that the full-employment level of output is $5000 billion and the natural unemployment rate is 5%.Suppose the current unemployment rate is 8%.What would be the current level of output according to Okun's law (when the Okun's law coefficient is 2)?
A)$4500 billion
B)$4700 billion
C)$4900 billion
D)$5000 billion

Question

Quizplus · Accepted Answer

Okun's law states that for every 1% increase in the unemployment rate above the natural rate, there will be a 2% decrease in output below potential (full-employment) output.

In this case, the unemployment rate is 3 percentage points above the natural rate (8% - 5% = 3%). Therefore, we can expect output to be 2 times 3%, or 6%, below potential output.

6% of $5000 billion is $300 billion. Subtracting this amount from potential output gives us $4700 billion, which is the current level of output according to Okun's law.

Therefore, the correct answer is B.

Assume That the Full-Employment Level of Output Is $5000 Billion