If the natural unemployment rate is 4 percent and potential GDP is $30 billion, then according to Okun's law, when the unemployment rate falls to 3 percent, real GDP
A) decreases to $29.4 billion.
B) remains constant at $30 billion.
C) first decreases by 4 percent and then increases by 4 percent.
D) increases to $30.6 billion.
E) increases to $60 billion.

Question

Quizplus · Accepted Answer

According to Okun's law, for every 1 percent decrease in the unemployment rate below the natural rate, there will be a 2 percent increase in real GDP relative to potential GDP. Thus, a decrease in the unemployment rate from 4 to 3 percent implies a 1 percent decrease below the natural rate, which corresponds to a 2 percent increase in real GDP. Therefore, real GDP will increase by 2 percent of potential GDP, which is $30 billion, or $0.6 billion, yielding a new real GDP of $30.6 billion.

If the Natural Unemployment Rate Is 4 Percent and Potential