Economics: Principles, Problems, and Policies, 19th Edition

by McConnell, Campbell R.; Brue, Stanley L.; Flynn, Sean M.

Published by McGraw-Hill Education

ISBN 10: 0073511447

ISBN 13: 978-0-07351-144-3

Chapter 26 - Business Cycles, Unemployment, and Inflation - Problems - Page 545: 3

Answer

${$40}$ billion

Work Step by Step

Recall that for Okun's Law, every one-percentage point increase in unemployment above its natural rate causes a 2% negative GDP gap. So, in this scenario, the unemployment rate is 4% above the natural rate, which correlates to a 8% GDP gap, and because the GDP is ${$500}$ billion, then the output being forgone to cyclical unemployment is $0.08\times 500={$40}$ billion.

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