Suppose that the natural rate of unemployment in a particular year is 4 percent and the actual rate of unemployment is 7 percent. Instructions: Enter your answers as whole numbers. a. Use Okun's law to determine the size of the GDP gap in percentage-point terms. b. If the potential GDP is $500 billion in that year, how much output is being forgone because of cyclical unemployment?
Added by Maria N.
Step 1
Given that the actual rate of unemployment is 7 percent and the natural rate is 4 percent, the difference is 7% - 4% = 3%. According to Okun's law, a 1% increase in unemployment corresponds to a 2% decrease in GDP. Therefore, a 3% increase in unemployment Show more…
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Assume that in a particular year the natural rate of unemployment is 5 percent and the actual rate of unemployment is 9 percent. Use Okun's law to determine the size of the GDP gap in percentage-point terms. If the potential GDP is $\$ 500$ billion in that year, how much output is being forgone because of cyclical unemployment?
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