The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate fell by 1 percentage point over a year, Okun's law predicts that real GDP would:
A) decrease by 1 percent.
B) decrease by 2 percent.
C) increase by 4 percent.
D) increase by 5 percent.

Question

Quizplus · Accepted Answer

Okun's law suggests that for every 1 percentage point decrease in the unemployment rate, real GDP increases by about 2 percentage points. With a normal growth of 3 percent, a 1 percentage point decrease in unemployment would lead to a 5 percent increase in GDP (3% normal growth + 2% from the decrease in unemployment).

The Version of Okun's Law Studied in Chapter 10 Assumes