Natural Rate of Unemployment - Okun’s Law

4 important questions on Natural Rate of Unemployment - Okun’s Law

What does Okun's law relate to changes in unemployment?

It relates cyclical unemployment changes to the output gap variations.

What is the association between a 1% increase in cyclical unemployment and the output gap?

A 1% increase results in about a 2% widening of a negative output gap.

How is the negative output gap measured?

It is measured in relation to potential output (Y*), indicating production levels.
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What happens to the output gap when cyclical unemployment increases?

The output gap worsens, with GDP falling further below its potential.

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