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

Question

Quizplus · Accepted Answer

Okun's Law states that for every 1 percent increase in the unemployment rate above the natural rate, there will be a 2 percent decrease in real GDP. In this case, the unemployment rate is 1 percent above the natural rate, so real GDP will decrease by 2 percent. Therefore, real GDP will be $98 billion ($100 billion minus 2 percent of $100 billion).

Suppose Potential GDP Is $100 Billion and the Natural Unemployment