Suppose your annual income in 2014 was $150,000. Using 2013 as the base year, ca

Question

Suppose your annual income in 2014 was $150,000. Using 2013 as the base year, calculate your real 2014 income measured in 2013 dollars if the CPI is 105 in 2014. Calculate the official rate of unemployment if the number of employed is 1,900 persons, the number of students is 120 persons, the number of unemployed is 100 persons, the number of new entrants seeking work is 20 persons, the number of retirees is 250 and the number of discouraged persons who would like a job is 10 persons Explain your answer. Suppose the seasonal unemployment is 2%, frictional unemployment is 1%, cyclical unemployment is 3% and structural unemployment is 4% What is the unemployment rate of full employment? Explain your answer.

Explanation / Answer

(a) Base year CPI = 100

Real income, 2014 = Nominal income, 2014 x (Base year CPI / Current year CPI)

= $150,000 x (100 / 105) = $142,857.14

(b)

Labor force = Employed + Unemployed + New entrants seeking job + Discouraged who would like a job

= 1,900 + 100 + 20 + 10 = 2,030

Unemployment rate = Number of unemployed / Number in labor force = 100 / 2,030 = 0.0493 = 4.93%

(c)

Full-employment level Unemployment rate** = Frictional unemployment + Structural unemployment

= 1% + 4%

= 5%

**Seasonal & cyclical unemployment are not considered as natural unemployment

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