Question

According to Okun's law, if the unemployment rate goes from 7% to 4%, what will be the effect on the GDP?

Answer 1

GDP will increase by 6% on decrease of the unemployment rate from 7% to 4%.

Explanation:

We are given that,

The unemployment rate decreases from 7% to 4%.

It is required to find the effect of this decrease on the GDP.

Since, we know,

If the unemployment rate increases (or decreases) by 1%, then the GDP will decrease (or increase) by 2%.

So, we get,

As the unemployment rate decreases by 3%, GDP will increase by double of 3% i.e. 6%

Hence, the GDP will increase by 6% on decrease of the unemployment rate from 7% to 4%.

Answer 2

If the law is basically if unemployment goes up 1% then the GDP goes down 2%, then the unemployment rate going down 3% means the GDP will go up 6%