The economy of Alpha operates according to Okun's law. In Alpha, potential GDP equals $500 billion, actual GDP equals $480 billion, and the natural rate of unemployment is 5 percent. What is the actual rate of unemployment in Alpha?

Question

Quizplus · Accepted Answer

Alpha's potential GDP is $500 billion, but actual GDP is 4 percent less than this because ($480 billion/ $500 billion)− 1 = −0.04. Using Okun's law, a 4 percent negative output gap means that actual unemployment is 2 percentage points higher than the natural rate of 5 percent.

The Economy of Alpha Operates According to Okun's Law