Question

Assume that the full-employment level of output is $5000 billion and the natural unemployment rate is 5%. Suppose the current unemployment rate is 8%. What would be the current level of output according to Okun's law (when the Okun's law coefficient is 2)?

Answer 1

Answer:

$4700 Billion

Explanation:

Solution

Given that:

Assume that full-employment level of output is =$5000 billion

Natural employment rate is =5%

Current unemployment rate = 8%

Now,

We find the current level of output according to Okun's law when the Okun's law coefficient is 2 which is given below:

2 (unemployment rate -natural unemployment) = potential GDP - actual GDP/potential GDP *100% this is known as the Okun's law

Thus

2( 8 - 5 ) = 5000 - actual GDP / 5000 * 100

or (6 * 5000 ) / 100 = 5000 - actual GDP = $4700 Billion

or

300 = 5000 - actual GDP

Hence, the actual GDP or current output = 5000 - 300 = 4700 $ billion