Suppose that there are 2,300 employed people in the economy and 200 unemployed people. Suppose, further, that 23 percent of the unemployed find jobs each month and that 2 percent of the employed lose their jobs each month.
If the unemployment rate stays constant from one year to the next, real GDP tends to increase by 3.5 percent because of normal increases in the labor force, capital stock, and improvements in technology. Furthermore, for every percentage point increase in the unemployment rate, real GDP growth falls by 2 percent. In equation form, we have: Percentage Change in Real GDP = 3.5 - 2 * Percentage Change in Unemployment Rate.
1. Suppose that the unemployment rate is initially 5 percent. If it DOES NOT change during the year, what is the growth rate (or percentage change) of real GDP?
2. If the unemployment rate increases to 6 percent, what is the growth rate of real GDP?
3. Again, if the unemployment rate starts at 5 percent and decreases by 2 percentage points to 3 percent. What is the growth rate of real GDP?