Question

1. Suppose you are given the following data for a small economy:

• Number of unemployed workers: 500,000.

• Labor force: 10,000,000.

Based on this data, answer the following:

a. What is the unemployment rate?

b. Can you determine whether the economy is operating at its full employment level?

c. Now suppose people who had been seeking jobs become discouraged and give up their job searches. The labor force shrinks to 900,5000 workers, and unemployment falls to 250,000 workers. What is the unemployment rate now? Has the economy improved?

2. Nominal GDP for an economy is $9 trillion. Real GDP is $7.5 trillion. What is the value of the implicit price deflator?

3. Suppose that people expect inflation to be equal 3 percent, but in fact prices rise by 5 percent. Indicate whether this unexpected higher rate of inflation would help or hurt each of the following groups.

a. a homeowner with a fixed-rate mortgage

b. a union worker with a fixed labor contract

c. a company that has invested some of its endowment in government bond which pay fixed rate of return.

4. Suppose table below records the total output and prices for an entire economy. Further, suppose the base year in the following table in 2017. Please find: (write the steps and calculation in details)

a. Nominal and real GDP in 2019

b. Nominal GDP in 2017

c. GDP deflator in 2019

d. Inflation rate in percentage from 2017 to 2019

Answer 1

1.

1. Unemployment Rate = (Number of Unemployed / Labor Force) * 100

Labor Force = Number of Employed + Number of Unemployed.

a)

Number of unemployed workers: 500,000.

Labor force: 10,000,000.

Unemployment rate= (500,000/10,000,000) x 100 = 5%

b) Full employment is when there is no cyclical unemployment. People who want to work are able to find work. We do not know the discouraged workers so it would be difficult to find out the full employment rate.

c)

The labor force = 900,5000 workers,  unemployment = 250,000

New unemployment rate = (250,000/9,005,000)x100= 2.78%

Though the unemployment rate fell from 5% to 2.78%, this is because labor force does not include discouraged workers. The economy has not improved. Labor Force includes only employed and unemployed workers.

2

GDP deflator= (Nominal GDP/Real GDP) x100.

Nominal GDP for an economy is $9 trillion.

Real GDP is $7.5 trillion

GDP deflator= ($9 trillion/$7.5 trillion) x 100= 1.2 x100=120%