Suppose the real GDP of an economy is $560 billion dollars andits unemployment rate is...

Suppose the real GDP of an economy is $560 billion dollars and its unemployment rate is 8%.

If the natural rate of unemployment is estimated at 5%, what is the value of the country’s potential GDP (LAS) in billions of dollars? Enter your response below rounded to 1 decimal place.

Expert Solution

The value of country's potential GDP is equal to the value of GDP when the unemployment rate is equal to the natural rate of unemployment.

And we know the country's natural rate of unemployment is equal to 5% but currently the unemployment rate is equal to 8% and the value of GDP is equal to $560 billion.

So we need to find the value such that if we subtract 3% of its value since the current unemployment rate is 3% higher than natural rate of unemployment we must get the value of $560 billion. Let the potential GDP of the country be $X.

Then it must be true that, as discussed above

X - 3/100 × X = $560

X - 0.03X = $560

X(1 - 0.03) = $560

X (0.97) = $560

X = $560/0.97

X = $577.31 billion

And since we are asked to round the answer to one decimal points then the answer should be,

Potential GDP of the country = $577.3 billion.

Rahul Sunny answered 2 years ago

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Suppose the real GDP of an economy is $560 billion dollars andits unemployment rate is...

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