Question

Instructions: Enter your answer as an absolute number According to Okun's law, if a country's recessionary output gap grows by 2 percent, then its cyclical unemployment rate will increase by percent

Answer 1

Okun's law explains the relationship between unemployment in a country and the loss of production (Gap between the actual output and the potential output).

As per the law, for every 1% increase in the unemployment rate, GDP will be roughly an additional 2% lower than its potential GDP.

In the given case, the recessionary output gap (the difference between actual and potential output) grows by 2 %. i.e,. the gap increased by 2% which is due to 1% increase in the unemployment rate.

In other words, Since Unemployment increased by 1%, the difference between actual and potential output (downside) grows by 2 % more.

Hence, the correct answer is 1%