Unemployment Rate: It is defined as the rate of unemployed people in an economy. All those people who are willing to work at the given wages but cannot find the job are known as unemployed. It is the ratio of unemployed to that of the labor force in the economy. Okun’s Law: This law states that the rate of unemployment and the output gap is inversely related to each other. When the output gap increases by one percent, the unemployment rate decreases by half percent. The relation established by Okun’s law is, Here, U n is unemployment rate. b is the intercept. m is the slope. Natural rate of unemployment: It is the rate of unemployment when the real rate of output is equal to the potential output in the economy. At such a point the economy does not have a recessionary or inflationary gap.

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Chapter 16, Problem 7P

To determine

Concept Introduction:

Unemployment Rate: It is defined as the rate of unemployed people in an economy. All those people who are willing to work at the given wages but cannot find the job are known as unemployed. It is the ratio of unemployed to that of the labor force in the economy.

Okun’s Law: This law states that the rate of unemployment and the output gap is inversely related to each other. When the output gap increases by one percent, the unemployment rate decreases by half percent.

The relation established by Okun’s law is,

Here,

U_nis unemployment rate.

b is the intercept.

m is the slope.

Natural rate of unemployment: It is the rate of unemployment when the real rate of output is equal to the potential output in the economy. At such a point the economy does not have a recessionary or inflationary gap.

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