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A spike in the unemployment rate - the biggest in more than

NEW YORK (CNNMoney.com) -- A spike in the unemployment rate - the biggest in more than two decades - raised new concerns Friday that a weak labor outlook, high oil prices and continuing woes in the housing and credit markets are leading the U.S. economy into a painful recession.

The government said Friday that the unemployment rate soared to 5.5% in May from 5% in April - much higher than economists had forecast.

The surge marked the biggest one-month jump in unemployment since February 1986, and the 5.5% rate is the highest level seen since October 2004. Unemployment is now a full percentage point higher than it was a year ago.....
CNN,June 6,2008

a) How does the unemployment rate in May compare to the unemployment rate during the past few recessions?

b) Why might the unemployment rate tend to actually underestimate the unemployment problem, especially during a recession?

c) How does the unemployment rate in May compare to the estimated natural unemployment rate? What does this imply about the relationship between real GDP and potential GDP at this time?

Solution Preview

A spike in the unemployment rate - the biggest in more than two decades - raised new concerns Friday that a weak labor outlook, high oil prices and continuing woes in the housing and credit markets are leading the U.S. economy into a painful recession.

The government said Friday that the unemployment rate soared to 5.5% in May from 5% in April - much higher than economists had forecast.

The surge marked the biggest ...

Solution Summary

A spike in the unemployment rate - the biggest in more than two decades - raised new concerns Friday that a weak labor outlook, high oil prices and continuing woes in the housing and credit markets are leading the U.S. economy into a painful recession.

The government said Friday that the unemployment rate soared to 5.5% in May from 5% in April - much higher than economists had forecast.

The surge marked the biggest one-month jump in unemployment since February 1986, and the 5.5% rate is the highest level seen since October 2004. Unemployment is now a full percentage point higher than it was a year ago.....
CNN,June 6,2008

a) How does the unemployment rate in May compare to the unemployment rate during the past few recessions?

b) Why might the unemployment rate tend to actually underestimate the unemployment problem, especially during a recession?

c) How does the unemployment rate in May compare to the estimated natural unemployment rate? What does this imply about the relationship between real GDP and potential GDP at this time?

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