Question

Suppose the natural rate of unemployment is 5%, with full-employment output of $7000. Use Okun's Law to calculate the level of national output if the employment rate is 7%.

Answer 1

Okun law states the negative relationship between GDP and unemployment.

Okun Law formula:

-2 (Unemployment rate - Natural unemployment rate) = (Actual output - Full employment output) / Full employment output.

=> -2 * (7% - 5%) = (Actual output - $7000) / $7000

=> -2 *(2%) = (Actual output - $7000) / $7000

=> -4% = (Actual output - $7000) / $7000

=> -0.04 = (Actual output - $7000) / $7000

=> -0.04 * $7000 = (Actual output - $7000)

=> -$280 = (Actual output - $7000)

=> Actual output = -$280 + $7000

=> Actual output = $6720

Answer: The level of national output is $6720 if the employment rate is 7%

--------------------------------------------------

If you like my work, please hit the like button :)

-------------------------------------------------