Chapter 12, Problem 7MCQ

To determine

The question requires us to determine the true option when real GDP is falling.

Explanation of Solution

GDP measures the production of final goods and services in a country in a given financial period.

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.

A falling GDP is an indication of a lower level of production of goods and services in an economy. A lower level of production means low requirements of workers, machinery, investment, and aggregate spending. Firms reduce their demand for workers. As a result, unemployment in the market rises. 

Thus, option “b” is correct.

The other two statements are incorrect because 

1. A falling GDP is an indication of contraction in an economy.<
2. The number of discouraged workers increases with a falling GDP because firms reduce their demand for labor, which reflects a lower availability of jobs in the market.<
3. Underemployment is related to over-qualification. It doesn’t relate directly to GDP.