Assume the natural rate of unemployment in the U

Economics Jun 07, 2021

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.

Expert Solution

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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