6. As the United States began to recoverfrom the 2001 recession, the job creatio

Question

6.   As the United States began to recoverfrom the 2001 recession, the job creation rate remained low, andthe unemployment rate did not fall as much as economic theory wouldsuggest.

Assuming that the natural rate of unemployment was relativelyconstant, which of the following statements helps explain how theunemployment rate could remain unchanged even as the economyexpanded?

(Hint: Think about what Okun's Law predicts in terms of aggregateand potential output.)
A.   Aggregate output was stilldeclining. B.   Aggregate output was growing at thesame rate as potential output. C.   Aggregate output was growing fasterthan potential output. D.   Aggregate output was notchanging.

Explanation / Answer

I agree with what you have chosen according to thisdefinition: The relationship is represented by a ratio of 1 to 2.5. Thus,for every 1% excess of the natural unemployment rate, a 2.5% GDPgap is predicted.

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