Question

The version of Okun's law studied in Chapter 9 assumes that, with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would: A. decrease by 1 percent. B. decrease by 2 percent. C. decrease by 3 percent. D. increase by 1 percent.

Answer 1

Answer:

A

Explanation:

The Okun´s law states that there is a negative relationship between GDP and unemployment. If unemployment increases, then GDP decreases. The formula is:

ΔY/Y= k-cΔU

Y: GDP

ΔY: change in GDP

k: constant that describes GDP grow with full employment

c: constant that describes the relationship between GDP and unemployment. With U.S data this is often 2%

U: unemployment

ΔU: change in unemployment

We apply this formula to our problem:

ΔY/Y= 3%-2%(2%)

ΔY/Y=-1%

Then GDP will decrease by 1%