Final answer:
Applying Okun's law and considering the natural rate of unemployment to be 4%, the GDP is expected to decrease by approximately 8% when the unemployment rate goes from 3% to 7%. Since this exact figure is not an option, the closest answer is a decrease by 11%.
Step-by-step explanation:
According to Okun's law, there is a relationship between unemployment rates and the Gross Domestic Product (GDP) of an economy. Specifically, for every 1% that the unemployment rate decreases below the natural rate of unemployment, there tends to be an associated approximate 2% increase in GDP. Conversely, for every 1% increase in the unemployment rate above the natural rate, GDP could be expected to decrease by about 2%.
If the natural rate of unemployment is assumed to be at 4%, and the unemployment rate rises from 3% to 7%, this is a 4% increase above the natural rate. Applying Okun's law, we can predict that the rise in unemployment would be associated with an 8% drop in GDP (4% x 2). Since this is not one of the options provided and assuming a 1:2 relationship, the closest available choice is:
C. It will decrease by 11%.