Question

If the difference between actual GDP and the trend output varies inversely with the difference between actual unemployment rate and the natural rate of unemployment, then such a relationship is called the

• A. Okun's law
• B. New Keynesian aggregate supply curve
• C. Taylor Rule
• D. New Keynesian Phillips curve

Answer 1

The Correct Option is A

The given problem involves understanding a specific macroeconomic relationship concerning GDP and unemployment. To identify the correct term for this relationship:

1. The problem describes a scenario where the difference between actual GDP and trend output varies inversely with the difference between the actual unemployment rate and the natural rate of unemployment.

2. This inverse relationship is known in macroeconomics as Okun's Law. It indicates that higher unemployment typically correlates with a GDP that is below potential output, reflecting economic inefficiencies.

3. Okun's Law is a well-established empirical relationship suggesting that effective economic policies must consider the trade-off between GDP growth and unemployment.

Other options like the New Keynesian aggregate supply curve, Taylor Rule, and New Keynesian Phillips curve focus on different macroeconomic concepts:

• The New Keynesian aggregate supply curve relates inflation to output in the short run.
• The Taylor Rule guides monetary policy using inflation and output gaps.
• The New Keynesian Phillips curve describes the relationship between inflation and economic activity, often accounting for expectations.

Therefore, the correct answer is Okun's law.