Question

1 What is a recession?

2 What causes a recession?

3 What phase of the business cycle are we currently in?

4 If 7 million workers are unemployed and 55 million workers are employed, calculate the unemployment rate. Round to the nearest tenth of a percent.

5 Starting from the previous problem, if 2 million unemployed workers stop looking for work, recalculate the unemployment rate. Round to the nearest tenth of a percent.

6 Starting from the previous problem, if 5 million of the employed workers are moved from full-time to part-time work, recalculate the unemployment rate. Round to the nearest tenth of a percent.

7 When the unemployment rate increases during a recession, why does the increase in the official unemployment rate understate the increase in the unemployment problem?

8 As the unemployment rate has decreased from 10.0% to below 5.0% over the last 8 years, why does the drop in the rate understate the improvement in the labor market?

Answer 1

1 What is a recession?

Fall in aggregate demand and resultant widespread fall in output that leads to fall in employment rate and price level, is known as recession.

2 What causes a recession?

Fall in aggregate demand in an economy causes recession.

3 What phase of the business cycle are we currently in?

US economy is already close to full employment level and GDP is growing with over 2 % rate. Which suggests that US economy is moving along the expansionary phase.

4 If 7 million workers are unemployed and 55 million workers are employed, calculate the unemployment rate. Round to the nearest tenth of a percent.

Unemployment rate = Unemployed / Unemployed + Employed

                         = 7 /55+7

                        = 7/62

                         = 11.29 %

5 Starting from the previous problem, if 2 million unemployed workers stop looking for work, recalculate the unemployment rate. Round to the nearest tenth of a percent.

Discouraged workers are not counted in labor force:

Hence unemployment rate = (7-2)/62-2

        = 5/60

       =8.33

6 Starting from the previous problem, if 5 million of the employed workers are moved from full-time to part-time work, recalculate the unemployment rate. Round to the nearest tenth of a percent.

Part time workers are not also considered as employed. Hence there would not be any change in employment rate.

7 When the unemployment rate increases during a recession, why does the increase in the official unemployment rate understate the increase in the unemployment problem?

During the recession workers are either underemployed or paid less wage which leads to the understating the increase in the unemployment problem.

8 As the unemployment rate has decreased from 10.0% to below 5.0% over the last 8 years, why does the drop in the rate understate the improvement in the labor market?

Fall in unemployment rate might have been caused by the fall in wage rate or underemployment of workers. Hence, drop in rate understate the improvement in the labor market.