Question

According to Okun's Law (and a natural rate of unemployment at 4.8%) if unemployment is 6.8% what do we expect the GDP Gap to be?

Please Note: We are assuming GDP is slightly lower than it actually is as we are ignoring the last $600 B of GDP and estimating U.S. GDP at $20 Trillion (you may be asked a question like this one on your exam)

$600 Billion

$400 Billion

$2 Trillion

$1 Trillion

$800 Billion

$200 Billion

Answer 1

According to okun law, if unemployment is 1percentage point above the natural rate, the output is 2 percentage point below the potential output.

Actual unemployment is 6.8%.

Natural rate of unemployment is 4.8%.

Since, actual unemployment is 2 percentage point above the natural rate of unemployment.

It means the actual output would be 4 percentage point below the potential output or there will be GDP gap of 4 percentage.

GDP gap = (0.04) * (20 trillion)

GDP gap = 0.8 trillion.

GDP gap = 800 billion

So, the correct answer is an option (e).