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Social ScienceLet y be the percent increase in annual US national production during a year when the unemployment rate changes by u percent. (For example, u=2 if unemployment increases from 4% to 6%.) Okun's law states thaty=3.5-2u. (a) What is the meaning of the number 3.5 in Okun's law? (b) What is the effect on national production of a year when unemployment rises from 4% to 8%?(c) What change in the unemployment rate corresponds to a year when production is the same as the year before?Enter the exact answer as a positive value. (d) What is the meaning of the coefficient -2 in Okun's law?
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Expert Answer
a) If we plug u=0 in y=3.5-2u then we get y=3.5 .
u=0 means no change in the unemployment rate.
So 3.5% is the rate of growth of US national production assuming no change in the unemployment rate.
b) If unemployment rises from 4% to 8%, then u = 8 − 4 = 4.
Plug u=4 in the given equation and find y.
Hence, y =3.5 − 2(4) = 3.5 − 8 = −4.5, so US national production should decrease by 4.5%.
c) If production is the same as in the previous year then there is no change in annual US ...
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