Chapter 12, Problem 3CYU

a)

To determine

The option which is consistent with the observed relationship between real GDP growth and changes in the rate of unemployment.

Explanation of Solution

A rising GDP indicates a higher demand for goods and services. To produce a higher quantity firms hire more and more workers in order to capture the market. Higher demand for workers reflects a lower unemployment rate in the market.

Similarly, a falling GDP indicates a lower demand for goods and services in the market and causes firms to lower their demand for workers. As a result, unemployment in the market rises.

So, the given statement is consistent with the observed relationship between real GDP growth and changes in the rate of unemployment.

b)

To determine

The option which is consistent with the observed relationship between real GDP growth and changes in the rate of unemployment.

Explanation of Solution

A higher value of GDP is an indication of a higher level of production of goods and services in an economy. To achieve a higher production level, more workers, machinery, investment, and aggregate spending are required.

A strong business recovery is possible when firms change machines, upgrade their technology, and innovates new ideas. It is not always true that recovery will bring down unemployment.

So, the given statement is not consistent with the observed relationship between real GDP growth and changes in the rate of unemployment.

c)

To determine

The option which is consistent with the observed relationship between real GDP growth and changes in the rate of unemployment.

Explanation of Solution

There is an inverse relationship between the GDP level and the unemployment rate in an economy that is a higher GDP indicates a lower level of unemployment while lower GDP indicates a higher level of unemployment in the country.

So, negative real GDP growth means falling GDP which causes unemployment to rise.

Therefore, the given statement is not consistent with the observed relationship between real GDP growth and changes in the rate of unemployment.