Okun's Law shows the relationship between cyclical unemployment and the size of the GDP gap, which is the difference between actual and potential GDP. It suggests that for every 1% increase in the unemployment rate above the natural rate, there will be a 2% decrease in the GDP gap. In other words, when unemployment is high, the economy is producing below its potential.

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What Is Okun's Law

Question 48

Multiple Choice

What is Okun's Law?

A) It measures the trade-off between the rate of inflation and the rate of unemployment.
B) It indicates the number of years it will take for any amount to double if compounded at a constant rate.
C) It quantifies the relationship between nominal and real incomes.
D) It shows the relationship between cyclical unemployment and the size of the GDP gap.
E) It states that supply creates its own demand.

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