Suppose the Okun's law coefficient is 2, the full-employment level of output is $5000 billion, and the natural rate of unemployment is 6%.(a)What is the current level of output if the current unemployment rate is 8%?(b)Suppose the unemployment rate falls to 5%; what is the current level of output?(c)Suppose structural changes in the economy raise the natural rate of unemployment to 7%, and lower the full-employment level of output to $4800 billion. If the current unemployment rate is 8%, what is the current level of output?
What will be an ideal response?
| (a) | From the Okun's law relationship ( - Y)/ = 2 (u -  ), we can solve for Y to get Y = [1 - 2(u - |
)] = [1 - 2(0.08 - 0.06)]5000 = 0.96 × 5000 = $4800 billion.| (b) | Y = [1 - 2(0.05 - 0.06)]5000 = 1.02 × 5000 = $5100 billion. |
| (c) | Y = [1 - 2(0.08 - 0.07)]4800 = 0.98 × 4800 = $4704 billion. |
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