Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 3 percent, according to Okun's law, is ________ percent.
A) 2
B) -4
C) 4
D) -2
E) Not enough information is given.

Question

Suppose an economy's natural rate of unemployment is 5 percent. If the unemployment rate is 3 percent, according to Okun's law,  is ________ percent.
A) 2 
B) -4 
C) 4 
D) -2 
E) Not enough information is given.

Quizplus · Accepted Answer

Okun's law states that for every 1 percent decrease in the unemployment rate below the natural rate, there will be a 2 percent increase in real GDP. Therefore, a 2 percent increase in real GDP corresponds to a 1 percent decrease in unemployment rate below the natural rate. Since the unemployment rate is 2 percent below the natural rate (5%-3%), the corresponding increase in real GDP is 4 percent (2% x 2).

Suppose an Economy's Natural Rate of Unemployment Is 5 Percent