Question

Suppose the CBO estimates that actual output is still 2 % below potential output. If that is the case, what is their estimate of the natural rate of unemployment?

a.2.1%

b.3.1%

c.4.1%

d.5.1%

e.6.1%

and why?

Answer 1

Option (C) is the right answer. 4.1% as it is twice of the GDP output change.

According to Okun's law, if the output is 2% below potential, then the unemployment will be 1% above the natural rate of unemployment.

2(unemployment rate-natural rate of unemployment) = (Potential output- Actual output/Potential output)*100%

u=n+1; x=x-2

where 'x' is potential output and 'u' is unmeployment and 'n' is natural rate of unemployment

2(n+1-n) = (x-x+2/x)*100%

2=(2/x)*100%

x=100