Suppose the natural unemployment rate is 5 percent, the actual unemployment rate is 6 percent, and potential GDP is $5,000 billion.Based on Okun's law, real GDP is equal to ________ billion.

Question

Quizplus · Accepted Answer

Okun's law states that for every percentage point that actual unemployment rate exceeds the natural rate, a negative GDP gap of approximately 2 percent occurs. Therefore, the GDP gap caused by the 1 percentage point difference between the actual unemployment rate of 6 percent and the natural unemployment rate of 5 percent is approximately 2 percent. Given that potential GDP is $5,000 billion, a 2 percent GDP gap would mean an actual GDP of 98 percent of potential GDP, which is $4,900 billion (98% of $5,000 billion).

Suppose the Natural Unemployment Rate Is 5 Percent, the Actual