Question

According to Okun's law, if the unemployment rate in 2009 was 9.6, the natural rate of unemployment was 7.4, and the potential GDP was $8,500 billion, what was the loss of output associated with the above-natural unemployment rate?

Answer 1

According to Okun's Law, the loss of output associated with the above-natural unemployment rate can be calculated using the deviation of the unemployment rate from its natural rate and the output gap.

Step-by-step explanation:

Okun's Law is an economic concept that relates the deviation of unemployment rate from its natural rate to the output gap, which is the difference between potential GDP and actual GDP. According to Okun's Law, for every 1 percentage point increase in the unemployment rate above its natural rate, there is a 2% decrease in real GDP. In this case, the unemployment rate is 2.2 (9.6 - 7.4) percentage points above the natural rate. Therefore, the loss of output associated with the above-natural unemployment rate would be 4.4% (2.2 x 2%) of the potential GDP.