In late 2006, the unemployment rate increased from 4.4 percent to 4.5 percent. It was reported that new jobs were created in several sectors including accounting, engineering services, computer design and education. These increases offset job losses in the construction and automobile industries. At the same time, the natural unemployment rate was estimated to be about 5.5 percent www.nytimes.com, 12/9/2006
Based on the story, the labor market reflects
A) a positive output gap.
B) a negative output gap.
C) cyclical unemployment.
D) efficiency wages.

Question

Quizplus · Accepted Answer

BThe labor market reflects both a positive output gap (A) because the actual unemployment rate (4.5%) is below the natural unemployment rate (5.5%), indicating that the economy might be operating above its potential output. It also reflects a negative output gap (B) because the increase in the unemployment rate from 4.4% to 4.5%, despite job creation in several sectors, suggests that the economy might not be growing fast enough to absorb all job seekers, indicating an economy not operating at its full potential.

In Late 2006, the Unemployment Rate Increased from 4