Suppose you are told that the current unemployment rate is above the natural unemployment rate by...

Suppose you are told that the current unemployment rate is above the natural unemployment rate by two percentage points.

(a) Based on the information above, is there any Cyclical unemployment in the economy? Yes or No? Please explain your answer.

(b) Describe our current economic condition. Include in your answer our current position on our Production Possibilities Frontier.

Solutions

Expert Solution

A - Yes , since the actual rate of unemployment is below the natural rate of unemployment , there is cyclical unemployment in the economy. The rate of cyclical unemployment is 2%. It cannot be frictional or structural , because they are considered to be in natural rates. Hence , due to economic slowdown ,there is cyclical unemployment in the economy.

B - This statement denotes that the economy is under the phase of recession where the unemployment rate is greater than the natural rate of unemployment. This means that all the respources will not be fully employed. Hence as far as position on PPC is considered , the economy will be lying inside the PPC because it is not operating with the full employment level.

Rahul Sunny answered 1 year ago

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