Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 7 percent, according to Okun's law, $\tilde { Y }$
is 4 percent.

Question

Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 7 percent, according to Okun's law, $\tilde { Y }$ 
is 4 percent.

Quizplus · Accepted Answer

According to Okun's law, for every 1% increase in the unemployment rate above the natural rate, a country's GDP will be roughly an additional 2% lower than its potential GDP. If the unemployment rate is 2% above the natural rate, $\tilde { Y }$ would be approximately 4% below potential GDP, not 4% itself.

Suppose an Economy's Natural Rate of Unemployment Is 5 Percent Y~\tilde { Y }Y~

Suppose an Economy's Natural Rate of Unemployment Is 5 Percent $\tilde { Y }$