Question

Assume that the full-employment level of output is $5000 billion and the natural unemployment rate is 5%. Suppose the current unemployment rate is 8%. What would be the current level of output according to Okun's law (when the Okun's law coefficient is 2)?

Answer 1

Using Okun's Law, which posits a 2% decrease in output for every 1% increase in unemployment above the natural rate, the current level of output with an 8% unemployment rate when the full employment output is $5000 billion and the natural unemployment rate is 5% would be $4700 billion.

Step-by-step explanation:

Understanding Okun's Law and Output Level CalculationThe question involves Okun's Law, which is a relationship between unemployment and economic output. According to Okun's Law, for every 1% that the unemployment rate exceeds the natural rate (also known as the full employment rate), a country's gross domestic product (GDP) will be roughly an additional 2% lower than its potential GDP. Given that the full-employment level of output is $5000 billion and the natural unemployment rate is 5%, and considering that the current unemployment rate is 8%, we can calculate the gap between the current unemployment rate and the natural rate, which is 3% (8% - 5%). Applying the Okun's law coefficient of 2, we find that the current output is 6% (3% * 2) below its potential. Therefore, the current level of output would be 94% of the full-employment level of output, which equates to $4700 billion ($5000 billion * 0.94).

Answer 2

$4700 Billion

Step-by-step explanation:

Solution

Given that:

Assume that full-employment level of output is =$5000 billion

Natural employment rate is =5%

Current unemployment rate = 8%

Now,

We find the current level of output according to Okun's law when the Okun's law coefficient is 2 which is given below:

2 (unemployment rate -natural unemployment) = potential GDP - actual GDP/potential GDP *100% this is known as the Okun's law

Thus

2( 8 - 5 ) = 5000 - actual GDP / 5000 * 100

or (6 * 5000 ) / 100 = 5000 - actual GDP = $4700 Billion

or

300 = 5000 - actual GDP

Hence, the actual GDP or current output = 5000 - 300 = 4700 $ billion