Final answer:
According to Okun's law, if the unemployment rate increases from 4% to 6%, the country's GDP is expected to be around 4% lower than its potential. The relationship between unemployment and GDP growth is not a strict rule and can be influenced by various factors, including cyclical and structural changes in the economy.
Step-by-step explanation:
According to Okun's law, there is a relationship between unemployment and economic growth, specifically gross domestic product (GDP). The law suggests that for each 1% increase in the unemployment rate, a country's GDP will be roughly 2% lower than its potential GDP. Therefore, if the unemployment rate rises from 4% to 6%, a 2% increase, we would expect the country's GDP to be around 4% lower than it could be if the unemployment rate had not changed.
It should be noted that Okun's law is an empirical observation rather than a strict, unbreakable rule. It can vary by country and over time, and other factors can influence the strength of the relationship between unemployment and GDP growth. For example, if the economy adjusted back to 4% unemployment but at a higher rate of inflation of 5%, this could suggest different underlying economic conditions than simple movement along Okun's curve.
To elaborate further, an increase in unemployment may be due to cyclical unemployment, which is usually the result of a downturn in the business cycle, such as a recession. This type of increase is often temporary as the economy eventually recovers, which aligns with Okun's observations. However, an increase could also be the result of a change in the natural rate of unemployment, which reflects long-term structural factors in the economy and is not directly related to the short-term business cycle.