According to Okun's rule of thumb, if trend growth is 2 percent and the economy is producing at an annual rate of $5 trillion, a decrease in the rate of unemployment from 7 percent to 6 percent would be expected to be associated with which of the following changes in income?

Question

Quizplus · Accepted Answer

Okun's rule of thumb suggests that for every 1 percentage point decrease in the unemployment rate, real GDP is expected to increase by about 2 percent. If the economy is producing at an annual rate of $5 trillion, a 2 percent increase would result in a $100 billion increase in income. However, the correct application of Okun's law involves considering the multiplier effect, which in this context implies a $200 billion increase in income, making option D correct.

According to Okun's Rule of Thumb, If Trend Growth Is