If the negative GDP gap were equal to 4 percent of the potential GDP, Okun's law suggests that the actual unemployment rate would exceed the natural rate of unemployment by
A) one percentage point.
B) two percentage points.
C) three percentage points.
D) four percentage points.

Question

Quizplus · Accepted Answer

According to Okun's Law, for every 1 percent negative GDP gap, the actual unemployment rate exceeds the natural rate of unemployment by 2 percentage points. Therefore, with a negative GDP gap of 4 percent, the actual unemployment rate would exceed the natural rate of unemployment by 2 x 4 = 8 percentage points. However, the question asks how much it would exceed by, so we only need to consider the difference, which is 8 - 6 = 2 percentage points. Therefore, the answer is choice B.

If the Negative GDP Gap Were Equal to 4 Percent