Suppose Xenia has a GDP of $15,000,000 and a population of 800,000 with a labor

Question

Suppose Xenia has a GDP of $15,000,000 and a population of 800,000 with a labor force of 600,000. Further suppose that 80,000 people are not working, of which 60,000 are actively seeking employment and 20,000 have given up. Further suppose that the frictional rate of unemployment is 2% and the structural rate is 1%. Please use this info to answer the next six questions.

27. The number of people who are frictionally unemployed is _______.

28. The economic cost of unemployment is ________dollars.

Now suppose that all of those who had “given up”, resume their job-search activity. In the immediate aftermath

29. Now the unemployment rate in Xenia is _____.

Explanation / Answer

(27)

Number unemployed = 60,000

Number frictionally unemployed = 60,000 x 2% = 1,200

(28)

Unemployment rate = Number unemployed / Labor force = 60,000 / 600,000 = 0.1 = 10%

Economic cost of unemployment = GDP x Unemployment rate = $15,000,000 x 10% = $1,500,000

(29)

New number unemployed = 60,000 + 20,000 = 80,000

New labor force = 600,000 + 20,000 = 620,000

New unemployment rate = New number unemployed / New labor force = 80,000 / 620,000 = 0.129 = 12.9%

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