Which of the following is a prediction consistent with Okun\'s law? What is Okun

Question

Which of the following is a prediction consistent with Okun's law?

What is Okun's law? When the government temporarily suspends citizen's right during periods of hyperinflation in an attempt to maintain security and stability. A change in the output gap causes a change in the natural rate of unemployment that is smaller in magnitude, and in the opposite direction. A change in the output gap causes a change in the natural rate of unemployment that is larger in magnitude, and in the opposite direction. When inflation causes a decrease in the value of money held by the public. Which of the following is a prediction consistent with Okun's law? A decrease in GDP of 4% leads to the unemployment rate increasing by precisely 4%. An increase in real GDP of 4% leads to the unemployment rate increasing by 6%. An increase in price level leads to a proportional decrease in the purchasing power of consumers. An increase in real GDP of 4% leads to the unemployment rate decreasing by 2%.

Explanation / Answer

Okun’s Law is a law which predicts the relationship between an economy's unemployment rate and its gross national product (GNP). It states that there exists an inverse relationship between the two variables.

1.

Correct option: (b) A change in the output gap causes a change in natural rate of unemployment that is smaller in magnitude, and in opposite direction.

(Reason: This is because as per the law, a 1% change in unemployment will inversely affect GNP by approximately 2%.  That is, change in output is two times change in unemployment)

2.

Correct option: (d) An increase in real GDP of 4% leads to unemployment rate decreasing by 2%.

(Reason: This is because as per the law, a 1% change in unemployment will inversely affect GNP by approximately 2%.  That is, change in output is two times change in unemployment)

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