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.

Question

Quizplus · Accepted Answer

Okun's law states that a 1 percentage point increase in the unemployment rate is associated with a 2 percentage point decrease in real GDP growth. Therefore, a 2 percentage point increase in the unemployment rate would be associated with a 4 percentage point decrease in real GDP growth. However, the question states that real GDP normally grows by 3 percent over a year. Therefore, the predicted decrease in real GDP growth would be 4 - 3 = 1 percent.

The Version of Okun's Law Studied in Chapter 9 Assumes