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Principles of Economics- Mankiw (5th) 681

Principles of Economics- Mankiw (5th) 681 - CHAPTER 31 A G...

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CHAPTER 31 AGGREGATE DEMAND AND AGGREGATE SUPPLY 705 FACT 3: AS OUTPUT FALLS, UNEMPLOYMENT RISES Changes in the economy’s output of goods and services are strongly correlated with changes in the economy’s utilization of its labor force. In other words, when real 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 lay off workers, expanding the pool of unemployed. Panel (c) of Figure 31-1 shows the unemployment rate in the U.S. economy since 1965. Once again, recessions are shown as the shaded areas in the figure. The figure shows clearly the impact of recessions on unemployment. In each of the re- cessions, the unemployment rate rises substantially. When the recession ends and real GDP starts to expand, the unemployment rate gradually declines. The unem- ployment rate never approaches zero; instead, it fluctuates around its natural rate of about 5 percent.
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