The version of Okun's law studied in Chapter 2 assumes that with no change in unemployment,real GDP normally grows by about 4 percent over a year.If the unemployment rate rose by 1 percent over a time period too brief for normal growth to occur,Okun's law would predict the corresponding change in real GDP to be a:
A) rise of about 0.5 percent.
B) rise of about 2 percent.
C) fall of about 2 percent.
D) fall of about 0.5 percent.

Question

Quizplus · Accepted Answer

According to Okun's law, a 1 percent increase in the unemployment rate would correspond to a 2 percent decrease in real GDP, assuming no change in productivity. Since this time period is too brief for normal growth to occur, there would not be enough time for productivity to offset the negative effects of the increased unemployment rate. Therefore, the corresponding change in real GDP would be a fall of about 2 percent.

The Version of Okun's Law Studied in Chapter 2 Assumes