Question

Use the table below to answer the following questions:

Labor Force of an Economy

Labor Force	Number of People (millions)
Employed	157.3
Structurally unemployed	5.2
Cyclically unemployed	5.3
Frictionally unemployed	2.9

Instructions: Round your answers to two decimal places.

a. Calculate the actual unemployment rate and the natural rate of unemployment for this economy.

      Actual rate of unemployment: 7.85% Correct

     Natural rate of unemployment: 4.75% Correct

b. Now assume that cyclical unemployment decreases by 1.7 million while structural unemployment increases by 0.5 million. Calculate the unemployment rate and the natural rate of unemployment for this economy.

      Actual rate of unemployment: 7.19% Incorrect

      Natural rate of unemployment: 5.0%7 Incorrect

Answer 1

(a) Calculate the actual unemployment rate and the natural rate of unemployment for this economy.

Actual Rate of Unemployment = Total Unemployed / Total Labor Force) * 100

Total Unemployed = Structurally Unemployed + Cyclically Unemployed + Frictionally Unemployed
= 5.2 + 5.3 + 2.9 = 13.4 millions

Total Labor Force = Employed + Structurally Unemployed + Cyclically Unemployed + Frictionally Unemployed
= 157.3 + 5.2 + 5.3 + 2.9 = 170.7 millions

Thus, Actual Rate of Unemployement = (13.4/170.7) * 100 = 7.85%

The Natural Rate of Unemployment = Naturally Unemployed / Total Labor Force

Naturally Unemployed = Structurally Unemployed + Frictionally Unemployed
= 5.2 + 2.9 = 8.1 millions

Total Labor Force = Employed + Structurally Unemployed + Cyclically Unemployed + Frictionally Unemployed
= 157.3 + 5.2 + 5.3 + 2.9 = 170.7 millions

Thus, the Natural Rate of Unemployment =  (8.1/170.70) * 100 = 4.75%

(b) Now assume that cyclical unemployment decreases by 1.7 million while structural unemployment increases by 0.5 million. Calculate the unemployment rate and the natural rate of unemployment for this economy.

Actual Rate of Unemployment = Total Unemployed / Total Labor Force

Total Unemployed = Structurally Unemployed + Cyclically Unemployed + Frictionally Unemployed
= 5.2 + (5.3 - 1.7) + (2.9 + 0.5) = 12.2

Total Labor Force = Employed + Structurally Unemployed + Cyclically Unemployed + Frictionally Unemployed
= (157.3 + 1.2) + 5.2 + (5.3 - 1.7) + (2.9 + 0.5) = 170.70

Thus, Actual Rate of Unemployment = (12.2/170.7) * 100 = 7.15%

Natural rate of Unemployment = Naturally Unemployed / Total Labor Force

Naturally Unemployed = Structurally Unemployed + Frictionally Unemployed
= 5.7 + 2.9 = 8.6 millions

Total Labor Force = Employed + Structurally Unemployed + Cyclically Unemployed + Frictionally Unemployed
= (157.3 + 1.2) + 5.2 + (5.3 - 1.7) + (2.9 + 0.5) = 170.70

Thus, the Natural rate of Unemployment = (8.6/170.7) * 100 = 5.04%