You are given the following data on the unemployment rate and output.
a. Assume that the natural rate of unemployment is
6% and that (Y - Y)/Y = 2(u - u‾). Find the fullemployment level of output in each year.
b. Calculate the growth rate of full-employment output in years 2, 3, and 4 two different ways. First,
calculate the growth rates by using the values
for full-employment output that you found in
part (a). Then calculate the growth rate of fullemployment output by using only the change
in the unemployment rate, the growth rate of
output, and the growth rate version of Okun’s
law, ∆Y/Y = ∆Y/Y - 2∆u, which is similar to
Eq. (6), except that in Eq. (6), ∆Y/Y = 3 for the
United States, where for this economy, ∆Y/Y
could differ from 3. Compare your answers from
the two sets of calculations.