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Suppose that the natural rate of unemployment in a particular year is 5 percent and the actual rate of unemployment is 13 percent. Instructions: Enter your answers as whole numbers. Use Okun’s law to determine the size of the GDP gap in percentage-point terms.

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jepessoa

Answer:

16%

Explanation:

the actual rate of unemployment is 8% higher than the natural rate of unemployment (= 13% - 5%), which means that cyclical unemployment is very high. Okun's law basically uses a rule of thumb where you need 2% economic growth rate to lower 1% of the unemployment rate (2 to 1 relationship).

So the GDP gap in percentage points = 8% unemployment higher than natural rate x 2 = 16%

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