Question

According to Okun's law, when cyclical unemployment increases by one percentage point, the recessionary gap ________ by ________ percent of potential output.

A. widens; one
B. closes; one
C. widens; two
D. closes; two

Answer 1

Okun's Law states that for each one percentage point increase in cyclical unemployment, the recessionary gap widens by two percent of potential output.

Step-by-step explanation:

According to Okun's Law, when cyclical unemployment increases by one percentage point, the recessionary gap widens by two percent of potential output. The correct answer is therefore C. widens; two. Okun's Law reveals the inverse relationship between unemployment and GDP, indicating that as unemployment rises, output falls further below its potential level, and the recessionary gap increases, reflecting economic downturn.