The relationship between the size of the negative GDP gap and the unemployment rate is
A) direct.
B) inverse.
C) undeﬁned.
D) direct during recession but inverse during expansion.

Question

Quizplus · Accepted Answer

The relationship between the size of the negative GDP gap and the unemployment rate is direct. This means that as the negative GDP gap increases (indicating a larger difference between actual and potential GDP), the unemployment rate also tends to increase. This relationship is explained by Okun's Law, which suggests that a larger negative GDP gap, indicating underutilization of economic resources, is associated with higher unemployment rates.

The Relationship Between the Size of the Negative GDP Gap