The version of Okun’s law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun’s law predicts that real GDP would:

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When evaluating Okun’s law in this version, the key relationship is that a rise in unemployment is associated with a drop in real GDP, with a specific quantitative link.
Option 1: 'decrease by 1 percent.' This matches the standard formulation where GDP growth falls by about twice the percentage-point rise in unemployment (3% baseline growth minus 2*2pp = -1% change in GDP). In words, if unemployment climbs by 2 percentage points, GDP growth is reduced sufficiently to yield roughly a 1% decrease in real GDP over the year.
Option 2: 'decrease by 2 percent.' This would imply a direct one-to-one effect of the unemployment increase on GDP (2pp unemployment → 2% GDP decline), which does not align with the 3% growth rule adjusted by 2 times the unemployment rise. The coefficient in Okun’s relation is effectively 2, not 1, once you start from the 3% baseline growth.
Option 3: 'decrease by 3 percent.' A 3% drop would require either a larger unemployment increase or a different form of the law; with a 2pp rise in unemployment in this version, the decrease is not as large as 3%. This option overstates the impact given the established linear approximation.
Option 4: 'increase by 1 percent.' This contradicts the core intuition of Okun’s law, since higher unemployment is associated with weaker output, not stronger. An increase in unemployment should not correspond to an increase in real GDP under this model.
In summary, the described mechanism ties a 2 percentage point rise in unemployment to a modest decline in real GDP, specifically around 1 percent, according to the given version of Okun’s law.

BU.220.610.51.FA25 M7 Practice Quiz

The version of Okun’s law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun’s law predicts that real GDP would:

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