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 fell by 1 percentage point over a year, Okun's law predicts that real GDP would:
A)decrease by 1 percent.
B)decrease by 2 percent.
C)increase by 4 percent.
D)increase by 5 percent.

Question

Quizplus · Accepted Answer

Okun's law states that for every 1 percentage point decrease in the unemployment rate, real GDP should increase by 2-3 percent. Therefore, if the unemployment rate falls by 1 percentage point over a year, and assuming that real GDP normally grows by 3 percent over a year, we can expect real GDP to increase by 5 percent (3 percent baseline growth + 2 percent due to the decrease in unemployment).

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