If the negative GDP gap were equal to 4% of the potential GDP, Okun's law suggests that the actual unemployment rate would exceed the natural rate of unemployment by:
A) One percentage point
B) Two percentage points
C) Three percentage points
D) Four percentage points

Question

Quizplus · Accepted Answer

Okun's law states that for every 1% increase in the negative GDP gap, there is a 2% increase in the unemployment rate above the natural rate. Therefore, a 4% negative GDP gap would result in an 8% increase in the unemployment rate above the natural rate, which is equivalent to a 2 percentage point difference (since the natural rate is typically around 4%).

If the Negative GDP Gap Were Equal to 4% of the Potential