The version of Okun's law studied in Chapter 10 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 posits that for every 1 percentage point increase in the unemployment rate, a country's GDP will be roughly an additional 2 percentage points lower than its potential GDP. Therefore, if the unemployment rate rises by 2 percentage points, real GDP would decrease by 4 percent from its potential growth rate. However, since the normal growth rate is 3 percent, the actual decrease in real GDP would be 1 percent (3 percent potential growth minus 4 percent due to increased unemployment).

The Version of Okun's Law Studied in Chapter 10 Assumes