Question

A person, aged 30, who has been actively seeking work, becomes discouraged at not being able to find a job and stops searching for work. The immediate impact of this decision will be:

a.The unemployment and participation rates will both increase

b.The unemployment and participation rates will both decrease

c.The unemployment rate will increase and the participation rate will decrease

d.The unemployment rate will decrease and the participation rate will increase

A retired worker, aged 60, is approached by her former employer to return to work in order to assist with the training of inexperienced staff. Assuming the worker accepts this job offer, which of the following statements, about the immediate impact of this decision, is most correct?

1. The unemployment and participation rates will both fall

2. The unemployment and participation rates will both rise

3. The unemployment rate will fall and the participation rate will rise

4. The unemployment rate will rise and the participation rate will fall

   
   

It used to be the case that workers had to (by law) retire at age 65. Now, there is no legal retirement age. Workers can work until whatever age they want. Using the model of the labour market discussed in class, and assuming that all other things remain unchanged, what is the most likely impact of this change in the law on the labour market equilibrium?

1. The real wage and the number of workers employed both increase.

2. The real wage and the number of workers employed both decrease.

3. The real wage decreases and the number of workers employed increases.

4. The real wage increases and the number of workers employed decreases.

   
   

Using the model of the national savings market discussed in class, and assuming all other things remain unchanged, what would be the most likely impact on equilibrium in the market for national savings, of the government moving from a budget deficit to a budget surplus?

1. The real interest rate and the amount of national savings and investment all fall.

2. The real interest rate and the amount of national savings and investment all rise.

3. The real interest rate rises and the amount of national savings and investment falls.

4. The real interest rate falls and the amount of national savings and investment rises.

   
   

Consider the model of the national savings market discussed in class. Imagine that we observe a decrease in both the equilibrium real interest rate and the equilibrium level of savings and investment. All other things being equal, this change is most likely to have been caused by:

1. A reduction in bank lending

2. A fall in the real interest rate

3. A decrease in national savings

4. An increase in national savings

Answer 1

(1) (b)

Discouraged workers are considered out of the labor force. Therefore, if an unemployed person gets discouraged and leaves labor force, both the number of unemployed and the labor force decrease. As a result, labor force participation rate (= labor force / working-age population) and unemployment rate (= number unemployed / labor force) will both decrease.

(2) (b)

Retired people are considered out of the labor force. Therefore, if a retired person gets employed and joins labor force, both the number of employed will and the labor force increase. As a result, labor force participation rate (= labor force / working-age population) and employment rate (= number employed / labor force) will both increase. Higher employment rate signifies lower unemployment rate.

(3) (c)

If people are allowed to work until any age, labor supply will rise, shifting labor supply curve rightward, which decreases wage rate and increases employment.

(4) (d)

A budget surplus will increase public savings, thus increasing national savings. Savings curve will shift rightward, decreasing interest rate and increasing savings & investment.

(5) (a)

When bank lending falls, firms reduce investment. The investment curve shifts leftward, decreasing both interest rate and savings & investment.