Question

12 ay if a country's natural unemployment rate is 5 percent and its actual unemployment rate is 6.5 percent, what is its cyclical unemployment rate? percent Instructions: Enter the value for the output gap as an absolute number b) According to Okun's law, this country would have a recessionary output gap of percent. 0123:17

Answer 1

Solution:-

(a). Natural unemployment rate= 5 percent

Actual unemployment rate= 6.5 percent

Cyclical unemployment = Actual unemployment rate - Natural unemployment rate

Cyclical unemployment = 6.5% - 5% = 1.5%

(b). Okun's law states that 1% point in cyclical unemployment is associated with 2% points of negative growth in real GDP.

Thus, 1.5% of cyclical unemployment results in a fall in GDP by 3%.

GDP gap is a % change in GDP actual and potential GDP. Thus,

with 1.5% cyclical unemployment, this country would have a recessionary output gap of 3%