According to Okun's Law, if the natural unemployment rate is 5 percent, the actual unemployment rate is 4 percent, and potential GDP is $10 trillion, then actual real GDP is
A) $12 trillion.
B) $11 trillion.
C) $9.6 trillion.
D) $10.4 trillion.
E) $10.2 trillion.

Question

Quizplus · Accepted Answer

Okun's Law states that a 1% increase in the unemployment rate is associated with a 2% decrease in real GDP. So, if the natural unemployment rate is 5% and the actual unemployment rate is 4%, then the output gap is 2%. This means that actual real GDP is 2% below potential GDP. Therefore, if potential GDP is $10 trillion, then actual real GDP is $10 trillion * (1 - 0.02) = $9.8 trillion.

According to Okun's Law, If the Natural Unemployment Rate Is