1. Suppose the population of Smithtown is 500,000. There are 50,000 people who a
ID: 1110200 • Letter: 1
Question
1. Suppose the population of Smithtown is 500,000. There are 50,000 people who are in school full-time and 30,000 retired. We also know that there are 50,000 who stay-at- home and another 20,000 institutionalized. There are 40,000 under the age of 16. Smithtown has 280,000 employed workers. What's the unemployment rate in Smithtown? (Show your work and round your answer to the nearest 10th. For example, if your answer is 3.86, you would round to 3.9%--that's the nearest 10th.) Full employment-596, so how much cyclical unemployment do we have in Smithtown?- a. b. Calculate the economic costs to Smithtown by applying Okun's law. What would our GDP gap be if potential GDP were $900B? (Do not use all those "0's" in your calculator, just use the number 900 and then add a "B" after it to indicate "billions" in your answer.)Explanation / Answer
a) Students, retiree, people who stay at home, people institutionalized, and those below age of 16 are not counted in labor force. The total no. of people who will not be counted in labor force=50000+30000+50000+20000+40000=190000.
So labor force will be =500000-190000=310000.
Employment is 280000. So unemployed people will be 310000-280000=30000,
Unemplyment rate=30000/310000 * 100=9.7%
Natural rate of unemployment is 5% so at this scenerio cyclical unemployment will be 9.7%-5%=4.7%
b. Okuns law says that 11% increase in cyclical unemployment causes 2% decrease in real GDP. Now the increase in cyclical unemployment is 4.7% so decrease in real GDP will be 2*4.7=9.4%.
Potential GDP is $900B. GDP gap will be 9.4% of 900=$84.6B
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