Question

Phelps was suspicious of the tradeoff suggested by the Phillips curve. He thought that sensible, forward-looking people should not change their behavior just because the prices on all the price tags in the economy increased at 4% per year instead of at 2% per year.

Phelps started his analysis by asking what determines the unemployment rate. One of the key points he recognized was that unemployment is the inevitable consequence of an economy in which some firms go out of business each month and some workers quit their jobs each month. Once a worker is out of a job, the individual will take some time searching for the next one.

Consider the following scenario.

Picture an economy with 100,000 workers in its labor force. The unemployment rate is simply the number of unemployed workers divided by the number of workers in the labor force. At the beginning of January, the unemployment rate is 4.76%, so 4,760 people in the labor force are unemployed.

Suppose that in January, 10% of the workers who were unemployed at the beginning of the month start new jobs. This means that _____(476 or 47,600) people leave the unemployment category in January.

Suppose that in January the job separation rate equals 1%. That is, 1% of the people who were employed at the beginning of the month are laid off or quit. This means ____ ( 95,240 or 952) people are added to the unemployment category that month. (Hint: Round your answer to the nearest whole number.)

Assume the size of the labor force does not change from January to February. Considering that the job separation rate is 1% during January, and 10% of unemployed workers find new jobs, the unemployment rate at the beginning of February will be approximately ____ (8.96%, 4.28%, 5.24%, 2.64%, 4.76&, 5.12%) .(Hint: Round your answer to the nearest hundredth.)

Generalizing from your calculations for January, if in February, the job separation rate is 1%, and 10% of unemployed workers get jobs, the unemployment rate at the end of February will ____ (increase, decrease, or remain the same) .

Suppose that at the beginning of August, the unemployment rate is 4.76%, however, this month just 0.1% of the employed workers become unemployed.

Suppose that in August, 10% of the workers who were unemployed at the beginning of the month find new jobs. The unemployment rate be at the beginning of September will be ____ (1.12%, 4.38%, 2.64%, 0.84%, 4.76%, 1.96%) . (Hint: Round your answer to two decimal places.)

Now suppose that in September, the job separation rate returns to normal: 1% of the workers who were employed at the beginning of the month become unemployed. As always, 10% of the workers who are unemployed find jobs during the month.

In the last question, you calculated a lower unemployment rate for the beginning of September. Use the numbers of employed workers and unemployed workers implied by this unemployment rate to calculate how many employed workers become unemployed during September and how many unemployed workers find jobs during September.

The unemployment rate at the end of September is ____ (4.25%, 2.75%, 3.5%, 8.5%, 5%) .

Answer 1

Answer: Suppose that in January, 10% of the workers who were unemployed at the beginning of the month start new jobs. This means that 476 (476 or 47,600) people leave the unemployment category in January.

[Reason: Since, the unemployment rate is 4.76% or 4,760 people out of 100,000 people; 10% of unemployed workers finding new job at the beginning of the month implies that 10% of 4760 workers = 476 workers.]

This means 952 ( 95,240 or 952) people are added to the unemployment category that month.

[Reason: Since, the unemployment rate is 4.76%; it means that 95,240 people out of 100,000 people are employed. Since in January the job separation rate equals 1%. That is, 1% of the people who were employed at the beginning of the month are laid off or quit. Thus, 1% of 95,240 people were laid off or quit = 952 (rounded to nearest whole number)]

The unemployment rate at the beginning of February will be approximately 5.24% (8.96%, 4.28%, 5.24%, 2.64%, 4.76&, 5.12%).

[Reason: In January 4,760 people were unemployed in the beginning of the month and 476 people out of the 4,760 people found new job while 952 people out of the employed (95,240) people were fired or quit. Thus, with no change in labor force the total unemployed in the beginning of February were 4,760 - 476 + 952 = 5,236 (or 5.236%). Which when rounded to nearest 100^th is 5.24%]

If in February, the job separation rate is 1%, and 10% of unemployed workers get jobs, the unemployment rate at the end of February will increase (increase, decrease, or remain the same) .

[Reason: The total unemployed in February was 5,236 people where 524 (rounded) found new job while 948 were fired or quit. Hence, the unemployment rate increases from 5.24% to 5.66%]

The unemployment rate be at the beginning of September will be 4.38% (1.12%, 4.38%, 2.64%, 0.84%, 4.76%, 1.96%).

[Reason: Since, the unemployment rate is 4.76% or 4,760 people out of 100,000 people in the beginning of August; 10% of unemployed workers finding new job at the beginning of the month implies that 10% of 4760 workers = 476 workers. While 0.1% of the employed losing job means 0.1% of 95,240 = 95 (rounded). Hence, unemployment rate at beginning of September is 4,760 + 95 - 476 = 4,379 out of 100,000 i.e, 4.38% (rounded)]

Since, the problem asks to use the calculated unemployment rate to find out how many were employed in September: 438 people (10% of 4,380 people found job) and lost job in September: 956 people (1% of 95,620 people, rounded).

The unemployment rate at the end of September is 5% (4.25%, 2.75%, 3.5%, 8.5%, 5%).

[Reason: Total unemployed at the end of September was 4380 - 438 + 956 = 4898 (or, 4.90%). In the question it is shown 5% because that was the nearest figure, and it was assumed that the options couldn't be refuted plus the idea of lower unemployment rate calculated in September beginning was taken into account with a rough assumption of it wasn't low enough to push the month end unemployment rate to 8.5%]