Asked Dec 3, 2019

Suppose the unemployment rate is 9%, the natural rate of unemployment is 4.5%, and Okun’s scalar has an absolute value of .015. If potential GDP is $20T, what do you expect the actual GDP to be? (Round to nearest $10B)


Expert Answer

Step 1

Okun’s law measures the relationship between output and unemployment. According to Okun’s law for every 1% increase in unemployment the output gap increases by some percentage point.

Step 2

Mathematically it can be expressed as follows,


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Y-Y = -B(u-u) Y (1) Here Y= actual GDP Y= potential GDP u actual unemployment rate u natural rate of unemployment B Okun's scalar that relates changes in unemployment to changes in output

Step 3

Given informa...


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Y= $20T u 9% u 4.5% B 0.015


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