Question

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A. Jol is a small economy. The information on the categories of the people in this economy is from a recent issue of the Jol Economic Watcher Agency shown in below:

Millions

                        Have a full-time job                                                                          790

                 Don't have a job but are looking for one                         335

                 Don't have a job and are not looking for one                  675

Based on the given information:

1. Calculate the Labour Force Participation Rate for this economy.     (3.5 Marks)
2. Calculate the Unemployment Rate for this economy.   (1.5 Marks)
3. Based on your answer in (b), what can you conclude about the economic situation in Jol? Briefly explain your answer.

4. Assume that nothing changed with respect to the population, i.e. those who were working kept their jobs and those who were looking for jobs kept looking for jobs.

State your answer whether INCREASE, DECREASE or NOT CHANGE for the following question:

i) Kef 35 years old, was discouraged by the poor job opportunities, so he was not working and not looking for a job. One day, his cousin calted him offering a job which he took.

• Unemployment rate will

(0.5 Mark)

Labour force participation rate will

(0.5 Mark)

ii) if a baby is born:

• Unemployment rate will

(0.5 Mark)

Labour force participation rate will

(0.5 Mark)

iii) After 50 years of hard work, Jack, 70 years old, retires.

• Unemployment rate will

(0.5 Mark)

Labour force participation rate will

(0.5 Mark)

B.

Fill in the blank

- cyclical - countervailing            - medium of exchange

           - expansionary        -expansionary monetary policy                 - trough

            - bank rate      - required reserve ratio                                        - frictional

              - dumping                                    - contractionary monetary policy      - automatic

             - excess reserve ratio           - store of value                          - contraction

a) Commercial banks hold a fraction of their deposits in cash in their vaults (or as deposits with the central bank). This fraction is known as the

b) The most direct way in which money replaces barter is through its use as a

c) A company of the Kenya has excess products that it does not want to sell into the Kenya market because it will bring down the domestic price and instead sells it in another country at below the cost of production. This situation is referred to as

d) The period of the business cycle in which real GDP is decreasing is called the

e) Workers at a steel plant are laid off because the economy is weak and the demand for       products         requiring         steel    has      is         an example   of unemployment.    

f) Declining oil prices from 2008 through the second quarter of 2010 has caused many economies to slow down. This has caused bank profits to decline, making Canadian banks vulnerable to a recession. The appropriate policy to be implemented is fiscal policy.

g) As housing prices began to drop and the economy slowed, the central bank began cutting its discount rate from 5.25% in June 2005 all the way to 0% by the end of 2006. With the economy still weak, it embarked on purchases of government securities from January 2007 until August 2012, for a total of $3.7 trillion. This is an example of

Answer 1

a. Labor force participation rate = (No. of people employed + No. of people Unemployed ) / Labor force

Here,

No. of people employed = 790

No. of people Unemployed = 335

Labor force = 790 + 335 + 675 = 1800

Labor force participation rate = (790 + 335 )/1800 = 1125/1800 = 0.625 = 62.5%

b. Unemployment rate = No. of people Unemployed / Labor force

Unemployment rate = 335 / 1800 = 0.186 = 18.6%

c. The unemployment rate in the economy is very high as it is close to 20%. Also the labor force participation rate is very less.

d.

(i) Kef 35 years old, was discouraged by the poor job opportunities, so he was not working and not looking for a job. One day, his cousin called him offering a job which he took.

It means one discouraged worker who was not in the unemployed people now looking for job so he will counted under he category of unemployed people.

• Unemployment rate will increase. [ as the numerator of unemployment rate increases while denominator remain same because it is assumed that nothing changed with respect to the population]
• Labor force participation rate also increases [ as the numerator of Labor force participation rate increases while denominator remain same because it is assumed that nothing changed with respect to the population]

ii) if a baby is born:

• Unemployment rate will not change. [ as the new baby is not in the category of labor force, so it will not change the unemployment rate]
• Labor force participation rate also not change. [ as the new baby is not in the category of labor force, so it will not change labor force participation rate]

iii) After 50 years of hard work, Jack, 70 years old, retires.

• Unemployment rate will increase. [ as Jack ( who was employed now retire, it means he is not in the labor force anymore), which leads to decrease denominator while numerator remain same it leads to increase the unemployment rate]
• Labor force participation rate decreases [ as Jack ( who was employed now retire, it means he is not in the labor force anymore), which leads to decrease denominator also numerator decreases, as now one employed people is no more employed, so the whole number (i.e, labor force participation rate) will decrease].

**First question is completely answered**