Question: Assume that a 1% change in the inflation rate causes a 1% increase in nominal interest rates, which in turn causes a 1% drop in real growth the following year. During the latter half of the 1990s, real growth averaged about 4%. Calculate how much inflation would have to increase for the following to happen, using Okun's Law.
(A) A 1% increase in the unemployment rate.
(B) A big enough change to cause a ‘‘typical'' recession, where real GDP declines 2%.
(C) Suppose real growth slows down to 2½% because of a change in consumer and business sentiment. How much would the unemployment rate change each year?