Question 3:

Suppose you work as an economic analyst in a large research organisation. Unemployment is a key statistic that both government and large investors closely follow to determine how best to implement future economic policies and investment decisions.

Go to FRED of the Federal Reserve Bank of St. Louis website (https://fred.stlouisfed.org/) and view the Harmonized Unemployment Rate: Total: All Persons for the European Union. Click on the max button, and a graph will show the unemployment rate in the European Union (EU) since 2000. Also using FRED find the Real Gross Domestic Product for European Union (28 countries) and plot the series from 2000.

a. Plot the two series. Does the behaviour of the unemployment rate illustrate the principle of co-movement discussed in the chapter? Why or why not?

b. Economic variables are sometimes divided into "leading indicators" and "lagging indicators." Leading indicators are variables that start to change before an economic expansion or contraction. Lagging indicators change only when an expansion or contraction is well underway. Based on the graph of the unemployment rate, is unemployment a leading or lagging indicator of recessions? Explain. How can we use this information when providing advice to a company that sells goods to consumers?