Question

It is estimated that the unemployment rate in the US economy has increased by approximately 20% in the past month. According to Okun's law

%∆Y=3%-2×∆U

the percentage change in GDP would be predicted to be ________ if the unemployment rate stayed that high for the rest of the year.

Group of answer choices

A)3.7 percent

B)-3.7 percent

C) -37 percent

D)37 percent

Answer 1

Okun’s Law describes the negative relationship between GDP and unemployment. It is given in the following mathematical form:

%∆Y=3%-2×∆U, where %∆Y is % change in real GDP and ∆U=change in unemployment rate.

It is estimated that the unemployment rate in the US economy has increased by approximately 20% in the past month i.e., ∆U = 20%.

Putting ∆U=20% we get:

%∆Y=3%-2×20%

Or, %∆Y=3%-40%;

Or, %∆Y=-37%.

So, the percentage change in GDP would be predicted to be (-37%) if the unemployment rate stayed that high for the rest of the year (Option C).