In general, how do changes in the unemployment rate vary with changes in real GDP? After several quarters of a severe recession, explain why we might observe a decrease in the official unemployment rate. Explain why we could see an increase in the official unemployment rate after several quarters of a strong expansion.

The primary relationship between the unemployment rate and real GDP lies in the concept of the business cycle. Essentially, when real GDP increases, the economy is typically experiencing an expansion, and businesses may need to hire more workers to meet the increased demand for their goods and services. As a result, the unemployment rate generally decreases. Conversely, when real GDP decreases, the economy is in a contraction or recession, businesses may struggle to sell their products, and they may need to lay off workers, thus increasing the unemployment rate.

One reason for a decrease in the official unemployment rate after several quarters of a severe recession is that the economy may have begun to recover. During an economic recovery, businesses may gradually start hiring more workers as demand for their goods and services increases, thus reducing the unemployment rate. Another reason is the "discouraged worker effect." After a prolonged period of unsuccessful job searches, some unemployed individuals may give up looking for work and exit the labor force. Since official unemployment rate only accounts for those who are actively seeking employment, the exit of discouraged workers from the labor force may lead to a decrease in the official unemployment rate.

While it may seem counterintuitive that the official unemployment rate could increase after several quarters of a robust economic expansion, there are a few reasons why this might happen: 1. Labor force participation: As the economy expands and job opportunities become more plentiful, people who previously were not actively seeking work (e.g., discouraged workers, stay-at-home parents) may decide to rejoin the labor force and start looking for jobs. As they begin actively seeking employment, they are counted as unemployed, causing the unemployment rate to rise temporarily. 2. Skill mismatch: During strong economic expansions, certain industries may grow more rapidly than others, leading to a mismatch between the skills that unemployed workers possess and the skills that employers are looking for. This mismatch can cause structural unemployment, where job vacancies exist, but the unemployed workers do not possess the skills required for the job. 3. Job losses in specific sectors: It's also possible that job growth is concentrated in certain industries, while other industries continue to lose jobs. This uneven distribution of growth can cause the unemployment rate to increase for workers in the industries with job losses, despite overall economic expansion.