L19 - Okun's Law

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ECON112
Sophia Lynch
Flashcards by Sophia Lynch, updated more than 1 year ago
Sophia Lynch
Created by Sophia Lynch about 4 years ago
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Question Answer
What is Okun's Law? Each increase of 1% of CYCLICAL UNEMPLOYMENT is associated with 2% percentage point increase in the OUTPUT GAP, measured in relation to TOTAL OUTPUT.
Okun's Law: Formula for Output Gap relative to Y* (potential output) (Y - Y*) / Y* = -2 (u - u*)
Okun's Law: Formula for Output Gap Y - Y* = -2 (u - u*) Y*
Okun's Law: Formula for Actual Output Y = Y* -2 (u - u*) Y*
What does Y, Y*, u & u* stand for? Y = Output Y* = Potential Output u = Unemployment Rate u* = Natural Rate of Unemployment
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