In Macroland, a country that operates according to Okun's law, potential GDP equals $10 trillion, the actual rate of unemployment is 8 percent, and the natural unemployment rate is 6 percent. What is real GDP in Macroland?

Question

Quizplus · Accepted Answer

According to Okun's law, for every 1% increase in the unemployment rate above the natural rate, GDP falls by about 2% from its potential. The unemployment rate is 2% above the natural rate, so GDP is 4% below potential. 4% of $10 trillion is $0.4 trillion, so real GDP is $10 trillion - $0.4 trillion = $9.6 trillion.

In Macroland, a Country That Operates According to Okun's Law