Question

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

Answer 1

Answer:

D. It will increase by 1%.

Step-by-step 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:

$\frac{\triangle Y}{Y} = u_1 - 2\triangle u$

This gives:

$\frac{\triangle Y}{Y} = 5\% - 2(5\% - 3\%)$

$\frac{\triangle Y}{Y} = 5\% - 2(2\%)$

$\frac{\triangle Y}{Y} = 5\% - 4\%$

$\frac{\triangle Y}{Y} = 1\%$

This implies that the GDP will increase by 1%