Question

The natural rate of unemployment is 4%, and the economy is producing 95% of its potential output. Okun's law predicts an unemployment rate of _____%.

A. 4
B. 5
C. 6.5
D. 9

Answer 1

so correct option is C. 6.5

Step-by-step explanation:

given data

natural rate of unemployment = 4%

economy producing = 95%

solution

we know here as Okun's law for the every 1 percentage increase in unemployment rate

GDP of country = 2% lower than potential GDP

but here is country GDP = 5% lower than potential GDP

so there is increase in the unemployment rate = 5% ÷ 2 = 2.5%

and unemployment rate is given = 4%

so effective unemployment rate will be

effective unemployment rate = 4% + 2.5%

effective unemployment rate = 6.5%

so correct option is C. 6.5