From 1989 to 1992,the output ratio fell by 4 percent while the unemployment rate rose by 1.44 percentage points.This implies an Okun's law coefficient of
A)2.60
B)0.36
C)2.40
D)5.40
E)0.059

Question

Quizplus · Accepted Answer

Okun's law states that for every 1 percent decrease in the output ratio, the unemployment rate rises by approximately 0.5 to 1 percentage point. Therefore, to calculate the Okun's law coefficient, we divide the change in the unemployment rate by the change in the output ratio:

Okun's law coefficient = (change in unemployment rate) / (change in output ratio)
Okun's law coefficient = (1.44%) / (-4%) = -0.36

The negative sign indicates an inverse relationship between unemployment and output. The absolute value of the coefficient is 0.36, which is closest to choice B, 0.36.

From 1989 to 1992,the Output Ratio Fell by 4 Percent