Defining
𝑢
as the unemployment rate and
𝑢
¯
as the natural rate of unemployment, we can write Okun’s law for the United States as the following equation:

Question

Defining 
𝑢
 as the unemployment rate and 
𝑢
¯
 as the natural rate of unemployment, we can write Okun’s law for the United States as the following equation:

BlackTom AI · Accepted Answer

Defining the components of Okun’s law in this question involves understanding how unemployment deviations relate to output deviations.
Option 1: 'Ŷ = −2 × u' would imply that output depends only on the current unemployment rate itself, with no reference to the natural rate ū. This ignores the concept of deviations from the natural rate and mis-specifies the relationship that Okun’s law expresses, which ties output changes to the gap between actual unemployment and its natural rate.
Option 2: 'Ŷ = 2 × (u − ū)' has the correct idea of using the unemployment gap, but the sign is incorrect. Okun’s law indicates that higher unemployment than the natural rate corresponds to lower output, so the coefficient should be negative to reflect this inverse relationship.
Option 3: 'Ŷ = −2 × (u × ū)' introduces multiplication of u and ū, which is not how Okun’s law relates output to unemployment. The law uses the difference (u − ū), not a product, to capture the gap between actual and natural unemployment.
Option 4: 'Ŷ = −2 × (u − ū)' correctly uses the unemployment gap (u − ū) and applies a negative coefficient, representing that when actual unemployment exceeds the natural rate, output falls. The multiplier (−2) is the standard proportionality used in this specification for the impact magnitude in the given formulation.
Option 5: 'Ŷ = −1/2 × (u − ū)' also uses the correct structure (the unemployment gap) but with an incorrect magnitude for the impact. The standard Okun’s law form provided uses −2, not −1/2, as the coefficient, so this option underestimates the effect.
In summary, the correct interpretation is that output deviation is proportional to the negative of the unemployment gap, with the specific coefficient reflecting the chosen scale; the only option that matches that structure and sign is the one that uses '−2 × (u − ū)'.

FA25 ECON 302 002 Midterm Exam #3 (Chapters 7-9): Sample Questions

Defining 𝑢 as the unemployment rate and 𝑢 ¯ as the natural rate of unemployment, we can write Okun’s law for the United States as the following equation:

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