Okun's Law describes the relationship between the output gap (the difference between actual GDP and potential GDP) and deviations of unemployment from the natural rate. It states that for every 1% increase in the output gap, there is a corresponding decrease in unemployment of about 0.5%. This relationship has been generally stable over time, although there are some variations in the exact magnitude of the effect.

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Okun's Law Refers to

Question 8

Multiple Choice

Okun's law refers to

A) The tendency for recessions in the USA to spread throughout the world
B) The generally stable negative relationship between the output gap and deviations of unemployment from the natural rate
C) The generally stable positive relationship between the output gap and deviations of unemployment from the natural rate
D) The tendency for business cycle volatility to fall over time
E) The negative relationship between unemployment and job vacancies

Correct Answer: