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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%.

User Rifaco
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2 Answers

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Answer: A. It will increase by 7%.

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

User Vildric
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Answer:

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%

User Norcal Johnny
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