Question

Okun's Law describes an empirically observed correlation between the unemployment rate (usually plotted on the horizontal axis and the real output gap (ie potential GDP net actual GDP). Given what you have learned about Macroeconomics, which of the following would you deduce? Select an answer and submit. For keyboard navigation, use the up/down arrow keys to select an answer. The correlation is negative and causal because labor is a factor of production for the aggregate production function. b The correlation is virtually due to simultaneous causality of the negative correlation from direct causality canceling out the positive correlation from reverse causality. > с The correlation is positive and reverse-casual because firms use forecasts of potential GDP to determine their demand for labor. d The correlation is spurious and virtually o due to an omitted common cause of confidence, which is positively correlated to both actual GDP and employment.

Answer 1

Answer (A)

The correlation is negative and causal because labor is a factor of production for the aggregate production function.