Suppose potential GDP is $100 billion and the natural unemployment rate is 5 per cent.If the unemployment rate is 6 per cent then,according to Okun's Law,real GDP is

Question

Quizplus · Accepted Answer

Okun's Law states that for every 1 percentage point increase in the unemployment rate above the natural rate, there will be a 2 percentage point decrease in real GDP relative to potential GDP.

Here, the unemployment rate is 1 percentage point above the natural rate (6% - 5% = 1%). So we can expect a 2 percentage point decrease in real GDP relative to potential GDP.

2% of $100 billion = $2 billion

Therefore, real GDP would be:

$100 billion - $2 billion = $98 billion

So the best choice is C) $98 billion.

Suppose Potential GDP Is $100 Billion and the Natural Unemployment