Question

According to Okun's law, if the unemployment rate goes from 5% to 3%, what will be the effect on the GDP?

A. It will increase by 7%.
B. It will decrease by 7%.
C. It will decrease by 1%.
D. It will increase by 1%.

Answer 1

Answer: A. It will increase by 7%.

Step-by-step explanation: I took this course!

Answer 2

D. It will increase by 1%.

Explanation:

Given

`u_1 = 5\%` --- initial rate

`u_2 = 3\%` --- final rate

Required

The effect on the GDP

To calculate this, we make use of:

`(\triangle Y)/(Y) = u_1 - 2\triangle u`

This gives:

`(\triangle Y)/(Y) = 5\% - 2(5\% - 3\%)`

`(\triangle Y)/(Y) = 5\% - 2(2\%)`

`(\triangle Y)/(Y) = 5\% - 4\%`

`(\triangle Y)/(Y) = 1\%`

This implies that the GDP will increase by 1%