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In Macroland, a country whose economy operates according to Okun's law, potential GDP equals $10 trillion, the actual rate of unemployment is 8 percent, and the natural unemployment rate is 6 percent. What is real actual GDP in Macroland?

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bogadu

Answer: $9.6 trilion

Explanation:

According to Okun's law each extra percentage point of cyclical unemployment is associated with about a 2 percent widening of a negative output gap, measured in relation to potential output.

Thus cylindrical unemployment = actual rate of employ - natural rate of employment

= 8 - 6 = 2

Thus this results in a -4 percent widening in negative output gap.

Hence actual GDP = 96/100 × 10 trillion = $9.6 trilion

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