CHAPTER 31AGGREGATE DEMAND AND AGGREGATE SUPPLY705FACT 3: AS OUTPUT FALLS, UNEMPLOYMENT RISESChanges in the economy’s output of goods and services are strongly correlatedwith changes in the economy’s utilization of its labor force. In other words, whenreal GDP declines, the rate of unemployment rises. This fact is hardly surprising:When firms choose to produce a smaller quantity of goods and services, they layoff workers, expanding the pool of unemployed.Panel (c) of Figure 31-1 shows the unemployment rate in the U.S. economysince 1965. Once again, recessions are shown as the shaded areas in the figure. Thefigure shows clearly the impact of recessions on unemployment. In each of the re-cessions, the unemployment rate rises substantially. When the recession ends andreal GDP starts to expand, the unemployment rate gradually declines. The unem-ployment rate never approaches zero; instead, it fluctuates around its natural rateof about 5 percent.
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