Making use of Okun's law,it may be computed that if the Bank of Canada reduces the money supply 5 percent and the quantity theory of money is true,then the unemployment rate will rise about:
A) 5 percent in both the short run and the long run.
B) 2.5 percent in both the short run and the long run.
C) 5 percent in the short run but will return to its natural rate in the long run.
D) 2.5 percent in the short run but will return to its natural rate in the long run.

Question

Quizplus · Accepted Answer

According to Okun's law, a decrease in output leads to an increase in unemployment. A 5% reduction in money supply would decrease output, causing a temporary rise in unemployment by about 2.5% in the short run, but it will return to its natural rate in the long run.

Making Use of Okun's Law,it May Be Computed That If