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Homework answers / question archive / Assume the natural rate of unemployment in the U

Assume the natural rate of unemployment in the U

Economics

Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 12 percent. According to Okun's law, the GDP gap as a percentage of potential GDP is

 

Multiple Choice

  • 14 percent.
  • 17 percent.
  • 5 percent.
  • 7 percent.

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Computation of GDP gap as a percentage of potential GDP:

GDP Gap = Actual Rate of Unemployment - Natural Rate of Unemployment

= 12% - 5% 

= 7%

According to Okun's law for every 1% point by which the actual unemployment exceeds the natural rate, A negative gap of about 2% occurs.

So, 

GDP Gap = 7%*2% = 14%

So, the correct option is 1st "14%".

 

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