State Okun's law and provide a simple interpretation of the relationship between unemployment and output.

• A. Okun's law describes a positive relationship between the unemployment gap and the output gap.
• B. Okun's law describes a negative relationship between the unemployment gap and the output gap; when unemployment rises above the natural rate, actual output falls below potential, and vice versa.
• C. Okun's law states there is no relationship between unemployment and output.
• D. Okun's law implies unemployment is fixed.

Answer: (B)

Okun's law shows how unemployment and output are linked in a way that moves in opposite directions. It says that when the economy is off its full-employment level, the gap between actual unemployment and the natural rate is tied to the gap between actual output and potential output, but in the opposite direction. In other words, if unemployment rises above the natural rate, the economy tends to produce below its potential output; if unemployment falls below the natural rate, output tends to exceed or approach potential. This negative relationship helps explain why weak job markets coincide with weak or sub-potential growth, and why strong employment tends to accompany higher output. The exact magnitude can vary, but the direction is the core idea.