Suppose that on average, unemployed workers find jobs at the rate of 30% per per

Question

Suppose that on average, unemployed workers find jobs at the rate of 30% per period and employed workers loose jobs into unemployment at a rate of 2% per period. Assume the size of the labor force is forever fixed.

Beginning with an unemployment rate of 5% this period, what will be the unemployment rate next period.

What is the steady state unemployment rate?

There was a political coup in Zimbabwe and the new military dictatorship is promising to raise government expenditure on goods. (Label all axes and curves carefully. Mark key points/coordinates) Using the aggregate demand and aggregate supply graph, show what are the long run consequences of government spending increase for the price level. Assume that the monetary authority wants to prevent the change in the output level that the expenditure increase would cause.What can it do and what consequences will its actions have for the interest rate (short run), and price level (long run)? Show using relevant diagrams.

Explanation / Answer

Consider the given problem here the labor force is fixe. Let’s assume that the labor force is given by “L” and “U” and “E” be the total unemployed and employed workers respectively.

So, if the “5%” be the unemployment rate, => “U=5%(L)” and “E=95%(L)”. now, “30%” unemployed workers get job, =>70% of “U” remain unemployed and “2%” of the employed worker lose their job, => after the 1st period the total unemployed worker are given by.

=> 70%(U) + 2%(E) = 70%[5%(L)] + 2%[95%(L)] = (350/10000)*L + (190/10000)*L.

=> (540/10000)*L = 5.4%(L). So, in the next period the unemployment rate increases to “5.4%”.

2).

Here the job finding rate is given by “f=30%” and the job losing rate is given by “s=2%”. Now, if “u“ be the steady state unemployment rate then at “u” then at the equilibrium “the number of people got new job” must be equal to “the number of people lose job”. So, the following condition must hold good.

=> f*U = s*E, => f*u*L = s*(1-u)*L, where “u=U/L” and “E/L = 1-u”.

=> f*u= s*(1-u) = s – s*u, => (f+s)*u = s, => u = s/(s+f) = 2/32 = 6.25%, => u=6.25%.

So, here the steady state unemployment rate is given by “u=6.25%”.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.