Download Relationship of Quantity of Output to Unemployment

College Preparatory Program • Saudi Aramco
Output vs Unemployment
Macroeconomics Tips (Graph Interpretation)
Relationship of Quantity of Output to Unemployment Rate
in a Recessionary Economy
Key Points:

If the economy is operating at Point A on the Output graph, this would correspond to Point A
on the Phillips Curve. With increased production there is a need to hire more workers.
Hence, Unemployment decreases and Price Level is higher.

If, however, the economy is operating at point B (a downward shift of the AD curve)
on the Output graph, this would correspond with point B on the Phillips Curve.
Hence, lower production or output in an economy simply means that industries
are not operating at their highest levels so workers are let go in order to cut costs.
As a result, Unemployment increases as Price Level drops.

As the Output graph illustrates, in the economy represented by these graphs,
there is a shift from AD₁ to AD₂ and a corresponding increase in the Unemployment Rate.

Low output + High Unemployment + Low Price Levels = Recession
Food for Thought:
Can you explain the above economy if the shift for AD were reversed?