Historical data shows that during the recession of 1990-1991, the natural rate of unemployment was about 5.9% while the actual unemployment rate was 7.0%. A decade later, during the 2001 recession, the natural rate of unemployment fell to 4.8% while actual unemployment was 6.0%. Which of the following statements is correct regarding these two short recessions?

a. The actual unemployment rate was higher during the recession of 1990-1991, but cyclical unemployment was higher in 2001.

b. Both the actual unemployment rate and cyclical unemployment were higher in 2001.

c. The actual unemployment rate was higher in 2001, but cyclical unemployment was higher from 1990-1991.

d. Both the actual unemployment rate and cyclical unemployment were higher during the recession of 1990-1991.

A - The actual unemployment rate was higher during the recession of 1990-1991, while cyclical unemployment was higher in 2001.

Explanation:

There are three main types of unemployment: cyclical, structural, and frictional. The first type is most common and occurs during a recession. The other 2 on the other hand, constitute the natural unemployment rate.

Cyclical unemployment occurs when demand for goods and services drop. This sees workers being laid off to cut costs. Cyclical unemployment creates more unemployment. Natural unemployment comprises frictional and structural unemployment. This explains why there is always unemployment present no matter how well the economy is doing. It involved people changing jobs as well as skills that may no longer be relevant in the previous field of work. Actual unemployment includes both natural employment rate and the cyclical employment rate.

Actual rate = cyclical unemployment rate + natural unemployment rate

In 1990-19991,

Cyclical unemployment = 7% - 5.9% = 1.1%

In 2001,

Cyclical unemployment = 6% - 4.8% = 1.2%

From this, we can see that the actual unemployment was higher in 1990=1991 while the cyclical unemployment was higher in 2001

a. The actual unemployment rate was higher during the recession of 1990-1991, but cyclical unemployment was higher in 2001.

Explanation:

Unemployment is defined as the number of people in a population that are willing to work and seeking for jobs but do not have employment.

Natural unemployment is defined as the normal process of leaving jobs and getting jobs in a situation when there is full employment.

Cyclical unemployment is created by recessions and booms.

Actual unemployment = Natural rate + Cyclical rate

Cyclical unemployment = Actual rate - Natural rate

In the first economy

Cyclical rate = 7 - 5.9 = 1.1%

In the second economy

Cyclical rate = 6 - 4.8 = 1.2%

So actual unemployment was 7% in 1990-1991 while in 2001 it was 6%

Cyclical unemployment was 1.1% in 1990-1991, while cyclical unemployment was 1.2%