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Okun's law refers to the negative relationship that exists between unemployment and real GDP. Okun's law can be summarized by the equation: in real GDP = 3% - 2 x [% in unemployment rate]. That is output moves in the opposite direction from unemployment, with a ratio of 2 to 1. In the short-run, when Y falls 5 percent, unemployment increases 2-1/2 percent. In the long-run, both output and unemployment return to their natural rate levels. Thus, there is no long-run change in unemployment.

I don't get it. Please help, thanks.

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Joshua Stredder
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28 Sep 2019

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Related questions

The natural rate of unemployment is 6%

(a) Suppose the short-run output over the next four years is falling and is at the levels of +2%, +1%, 0%, and -1%. According to Okun's law, what unemployment rates should we expect to see in this economy?

(b) Consider another economy in which the unemployment rate over the next three years is 6%, 7%, and then 4%. Use Okun's law to solve for the levels of short-run output, Y, expected in each year.

During the depression, the U.S central bank, the Federal Reserve, enacted policies that increased the money supply by 6%.

1) What happens to the level of output and the price level in the shor- run and in the long-run?

2) Assume that the velocity is constant, what are the percentage change of output and price level in the short run and long run? (Hint: use quantity theory of money).

3) What happens to unemployment in the short-run and long-run? (Hint: Okun's law can be summaries in the following equation: in unemployment rate =

% in real GDPĀ )

4) What happens to the real interest rate in the short-run and long-run? (Hint: Use the model of real interest rate in Chapter 3, to see what happens when output changes)

1. For a closed economy, the IS curve describes short-run movements in an economy via which of the following?

a. Interest rate Investment Output
b. Interest rate Investment Output
c. Tax rate Consumption Output
d. Interest rate Investment Output
e. Tax rate Government expenditure Output

2. A key difference between the long run and short-run models is the assumption _____________ in the short run

a. of zero inflation
b. of perfect price flexibility
c. that unemployment always equals its natural rate
d. that the economy never deviates from its long-run equilibrium
e. of sticky inflation (inflexible prices)

3. If prices are sticky and the Fed raises the nominal interest rate (ceteris paribus), __________ and __________ in the short run.

a. the real interest rate remains constant; real output remains at potential
b. the real interest rate falls; short-run real output falls
c. the unemployment rate rises; short-run real output rises
d. the real interest rate rises; short-run real output falls
e. the real interest rate falls; current real output falls

4. According to the Phillips curve, if the current output is above potential output (a boom),

a. inflation rises.
b. inflation falls.
c. unemployment rises.
d. inflation is constant.
e. prices fall.

5. According to the Phillips curve, in general during a recession

a. inflation rises.
b. prices fall.
c. unemployment falls.
d. inflation is constant.
e. inflation falls.

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