The economy of Alpha operates according to Okun's law.In Alpha,potential GDP equals $500 billion,actual GDP equals $520 billion,and the natural rate of unemployment is 5%.What is the actual rate of unemployment in Alpha?

Question

Quizplus · Accepted Answer

According to Okun's law, for every 1% increase in GDP above potential GDP, the unemployment rate decreases by about 0.5%. With actual GDP $20 billion above potential GDP, this represents a 4% increase over potential GDP ($20 billion / $500 billion = 0.04 or 4%). This implies a 2% decrease in unemployment from the natural rate of 5%, resulting in an actual unemployment rate of 3%.

The Economy of Alpha Operates According to Okun's Law