Question

question 10 of 25
according to okuns law, if the unemployment rate goes from 4% to 6%, what will be the effect on the gdp?

a. it will increase by 7%.

b. it will increase by 1%.

c. it will decrease by 7%.

d. it will decrease by 1%.

Explanation:

Okun's law states that for every 1% increase in the unemployment rate, the GDP decreases by approximately 2 - 3% (simplified, often taken as a 2% GDP decrease per 1% unemployment increase for the gap, but the standard Okun's law formula is \( \Delta Y/Y = 3\% - 2\Delta u \), where \( \Delta u \) is the change in unemployment rate). Here, unemployment rate increases from 4% to 6%, so \( \Delta u = 2\% \). Using the formula, \( \Delta Y/Y = 3\% - 2\times2\%= - 1\% \)? Wait, no, maybe the simpler version: the relationship is that a 1% increase in unemployment leads to a 2% decrease in GDP (the "gap" version). Wait, actually, the original Okun's law (for the US) is that a 1% rise in unemployment above the natural rate leads to a 2% fall in GDP below potential. But if we consider the change: from 4% to 6% is a 2% increase in unemployment. If we take the coefficient as 3% GDP change for 1% unemployment (some versions), but more commonly, the formula is \( \text{Change in GDP growth rate} = 3\% - 2\times\text{Change in unemployment rate} \). Wait, no, maybe the question uses a simplified version where for each 1% increase in unemployment, GDP decreases by 3.5%? Wait, no, let's recalculate. Wait, the options have 7% decrease. Let's see: the unemployment rate increases by \( 6\% - 4\% = 2\% \). If Okun's law says that a 1% increase in unemployment leads to a 3.5% decrease in GDP (some sources use 3% - 3.5%), then 2% increase in unemployment would lead to \( 2\times3.5\% = 7\% \) decrease. So the correct answer is C, as the GDP decreases by 7% when unemployment rises by 2% (from 4% to 6%).

Answer:

C. It will decrease by 7%.