Using Okun's Law, in 2018, compared to u, the natural rate of unemployment rate u* is

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Restating the question and options to anchor the analysis:
Question: Using Okun's Law, in 2018, compared to u, the natural rate of unemployment rate u* is
Answer options: ["larger", "smaller", "the same", "Impossible to determine"]

Now, let's evaluate each option in turn and connect to Okun's Law concepts and typical macroeconomic context for 2018.

Option 1 — "larger": This option asserts that u* is larger than the actual unemployment rate u in 2018. Under Okun's Law, the unemployment rate and the output gap are related: when unemployment is below its natural rate (u < u*), the economy is typically operating above potential output, or at least producing more than its sustainable level. In many advanced economies around 2018, the observed unemployment rate was relatively low (for example, the U.S. and several others had unemployment near or below 4%), while estimates of the natural rate u* often hovered around 4% or higher depending on the estimate and the country. If u is around 3.9% and u* is around 4% or higher, then u* being larger than u would be consistent with the data indicated by these typical estimates and with the sense that the economy was near or slightly above potential output. This interpretation aligns with Okun's framework that a lower-than-natural unemployment rate accompanies a smaller negative output gap or even a positive one.

Option 2 — "smaller": If u* were smaller than u (u* < u), that would imply that the natural rate of unemployment is lower than the actual unemployment rate, i.e., the economy is operating below its potential (a negative output gap). However, for 2018, observed unemployment was generally not that high relative to many estimates of the natural rate in several economies, so this scenario would not typically be consistent with the common readings of 2018 labor markets. This makes the option less plausible in standard Okun's Law interpretations for that year.

Option 3 — "the same": This would claim u* equals u in 2018. Under Okun's Law, this would correspond to an output gap of zero in that year. While some quarters or periods can hover near potential, the consensus in many economies around 2018 was that unemployment was close to, but not necessarily exactly equal to, the estimated natural rate. Claiming exact equality across the board risks oversimplification and ignores measurement uncertainty in both the actual rate and the natural rate. Therefore this option is less defensible as a universal statement for 2018.

Option 4 — "Impossible to determine": This would suggest that, given Okun's Law alone, we cannot ascertain whether u* is larger, smaller, or equal to u in 2018. In principle, Okun's Law relates the output gap to unemployment, but it does not by itself fix the precise numerical relationship between u and u* without additional country- and time-specific data (like actual unemployment, estimated natural rate, and output gap). If the question intends to force a single comparative conclusion for 2018, this option might be tempting due to data uncertainty. Nevertheless, common macroeconomic data and standard interpretations of Okun's Law for 2018 often provide enough context to compare u and plausible u* values, making this option less consistent with typical exam expectations unless the question emphasizes data ambiguity.

In summary, evaluating each choice against the core ideas of Okun's Law and the 2018 macro context helps distinguish the most plausible comparative claim, while acknowledging that precise judgments depend on the country and the exact estimates of the natural rate at that time.

ECON10003_2025_SM1 Pre-Tutorial Quiz 3

Using Okun's Law, in 2018, compared to u, the natural rate of unemployment rate u* is

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