The economy of Alpha operates according to Okun's law.In Alpha,potential GDP equals $500 billion,the natural rate of unemployment is 5%,and the actual rate of unemployment is 3%.What is actual GDP in Alpha?

Question

Quizplus · Accepted Answer

Okun's law suggests that for every 1% decrease in unemployment, GDP increases by about 2% of potential GDP. With unemployment 2% below the natural rate, GDP is 4% above potential GDP. Therefore, actual GDP is $500 billion + 4% of $500 billion = $520 billion.

The Economy of Alpha Operates According to Okun's Law