Use the equation for Okun's Law. Suppose the current unemployment rate is 10% and the natural rate of unemployment is 5%.

a. If real GDP is growing at an annual rate of 2.1%, how many years will it take the economy to get to full employment? [This is a trick question]

b. What annual rate of growth is required to get the economy to full employment in 2 years?

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Sonal BahlLv10

29 Sep 2019

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Related questions

The natural rate of unemployment is 6%

(a) Suppose the short-run output over the next four years is falling and is at the levels of +2%, +1%, 0%, and -1%. According to Okun's law, what unemployment rates should we expect to see in this economy?

(b) Consider another economy in which the unemployment rate over the next three years is 6%, 7%, and then 4%. Use Okun's law to solve for the levels of short-run output, Y, expected in each year.

maroonmink389

The answer is:

Okun's law refers to the negative relationship that exists between unemployment and real GDP. Okun's law can be summarized by the equation: in real GDP = 3% - 2 x [% in unemployment rate]. That is output moves in the opposite direction from unemployment, with a ratio of 2 to 1. In the short-run, when Y falls 5 percent, unemployment increases 2-1/2 percent. In the long-run, both output and unemployment return to their natural rate levels. Thus, there is no long-run change in unemployment.

I don't get it. Please help, thanks.