Which of the following statements is likely to be true according to Okun's Law?
A) The unemployment rate remains constant when the growth rate of real GDP is 0 percent.
B) The unemployment rate remains constant when the growth rate of real GDP is 2 percent.
C) The unemployment rate declines when the growth rate of real GDP is below 2 percent.
D) The unemployment rate is zero when the growth rate of real GDP is exactly 1 percent.

Question

Quizplus · Accepted Answer

According to Okun's Law, there is a negative relationship between the unemployment rate and the growth rate of real GDP. Specifically, for every 1 percent increase in the growth rate of real GDP, the unemployment rate is expected to decrease by a certain amount (usually estimated to be around 0.5 percent). Therefore, if the growth rate of real GDP is 2 percent, it is likely that the unemployment rate will remain constant (since it would not have decreased by enough to overcome any natural increase in the labor force). Option A cannot be true since changes in the unemployment rate is not solely determined by changes in real GDP growth, but also other factors. Option C is unlikely as it suggests that declining growth rates will lead to lower unemployment rates, which contradicts Okun's Law. Option D is not consistent with Okun's Law as it predicts a linear relationship between real GDP growth and unemployment rate, which is not the case.

Which of the Following Statements Is Likely to Be True