What does Okun's Law describe?

• A. The relationship between inflation and employment
• B. The relationship between GDP and unemployment
• C. The relationship between aggregate supply and demand
• D. The interaction between prices and wages

Answer: (B)

Okun's Law specifically describes the negative relationship between a country's unemployment rate and its gross domestic product (GDP). It indicates that as GDP increases, unemployment tends to decrease, reflecting the idea that higher economic output generally leads to more job creation. Conversely, a decline in GDP is associated with rising unemployment rates. This relationship is empirical and based on historical observations rather than being a strict rule, quantifying how much unemployment can be expected to change with a change in GDP. Hence, the selection accurately identifies the core principle of Okun's Law, focusing on the interaction between economic output and employment levels. Understanding this relationship is crucial for analyzing economic performance and the effectiveness of policies aimed at reducing unemployment.