In the labor market module, Okun's Law states that changes in GDP are closely related to unemployment
Question:
In the labor market module, Okun's Law states that changes in GDP are closely related to unemployment rates. The original formula for this relationship is ?u=1.4-.4(%?GDP). According to this formula, if GDP remains stagnant, the unemployment rate is expected to increase by 1.4%. Conversely, we can use this formula to determine the level of GDP growth needed to maintain full employment. By setting ?u to zero, we can solve for the growth rate in GDP needed to keep the economy at its current employment level, which is effectively the expected long-term growth of potential GDP.
Using the original Okun's Law equation, we get 0=1.4-.4(%?GDP), which can be simplified to .4(%?GDP)=1.4. Solving for (%?GDP) gives us 3.5%. This means that if the economy is at full employment and GDP grows at a rate of 3.5% each year, there will be no change in unemployment and the economy will continue to operate at its full employment level.
Below, there is a picture of the original regression rerun for different time periods to show the changing nature of the link between unemployment and inflation. Two of these regressions are repeated and uploaded to this question. You can use each of these to restate the relationship between GDP and unemployment and solve for the rate of GDP growth needed to maintain full employment in each case.
![image text in transcribed](https://s3.amazonaws.com/si.experts.images/answers/2024/05/664531736414c_67466453172f2076.jpg)