The accompanying scatter diagram shows the relationship between the unemployment rate and the output gap in the United States from 1996 to 2013. Draw a straight line through the scatter of dots in the figure.

Assume that this line represents Okun’s law:

Unemployment rate = b − (m × Output gap)

where b is the vertical intercept and −m is the slope

What is the unemployment rate when aggregate output equals potential output? What would the unemployment rate be if the output gap were 2%? What if the output gap were −3%? What do these results tell us about the coefficient m in Okun’s law?

Transcribed Image Text:

-8 -6 -4 C -2 Unemployment rate 8% 6 2 0 A B 2 Output gap 4%