“Okun’s Law” refers to a relationship between output and unemployment. Define this relationship precisely (including in form of an equation) and discuss whether it is a “law” in a theoretical sense or an empirical regularity found in macroeconomic data.
Denote the equilibrium growth rate of output as . Consider two economies, Japan and the United Kingdom, that exhibit the same equilibrium growth rate of output . Assume that both economies are in equilibrium at the outset of the great recession in 2008 and both experience the same negative output shock in percentage terms during the first year of the recession. However, their unemployment rates change in rather different ways. Construct a diagram that would depict curves of Okun’s Law for both countries in the same graph. Describe how you expect the two countries’ unemployment to change, and also describe at least one reason for any difference in reaction that you might predict.