Suppose the economy has a natural rate of unemployment of 5%.
(a) Suppose short-run output over the next 4 years is +1%, 0%, −1%, and −2%. According to Okun’s law, what unemployment rates would we expect to see in this economy?
(b) Consider another economy in which the unemployment rate over the next 3 years is 6%, 7%, and then 4%. According to Okun’s law, what are the levels of short-run output Ỹ this economy?