Question

31. The unemployment rate and the labor force participation are two labor statistics that are used to analyze the economy. In each of the scenarios below, state the impact that the event will have of both the labor force participation rate and the unemployment rate. Explain your answers using the formulas to calculate labor force participation and the unemployment rate that were discussed in this unit.

a. A car manufacturing company goes bankrupt and is forced to lay off all of its workers. All the laid off workers believe that they do not have skills for a new job and do not look for new jobs.

b. College graduates begin to look for jobs just as a recession begins. Firms are not looking to hire college graduates but the new college graduates are actively looking for jobs.

c. The stock market crashes. As a result, workers who were close to the age of retirement delay retirement and continue to work.

d. As a result of more accessible healthcare, people are healthier and living longer lives.

Extra Credit [2 points]: As between the labor force participation rate and the unemployment rate, which statistic does a better job of explaining the health of the economy? Explain your answer.

33. The economy of Mandalore is experiencing a recession. Using the AS-AD model, draw the Mandalorian macroeconomy in recession. Label the all curves correctly and label the initial equilibrium E1. Suppose that the Mandalorian legislature decides to address the recession by debating the use of fiscal policy.

Part 1: List two types of legislative policies the Mandalorian legislature could utilize to bring the economy to long run equilibrium.

Part 2: Assuming the legislature enacts the appropriate level of stimulus, draw and label the appropriate curves illustrating the Mandalorian economy's movement to long run equilibrium. Plot the new equilibrium and label it E2.

Part 3: Assume the Mandalorians' confidence in the legislature is small and they assume that any stimulus now will be met with an increase in taxes later. Given this assumption, how will this fact impact the Mandalorian legislature's fiscal policy action?

34. On May 1, Jobs Bank (JB) holds $200 million in deposits and is required by the Federal Reserve to maintain a reserve ratio of 12.5%. JB holds twice the minimum of amount of reserves required by the Federal reserve.

Part 1: Show a T-account for JB on May 1.

Part 2: On May 5, JB’s largest depositor, Switzer, withdraws $20 million from her account. (a) Show JB’s T-account immediately after Switzer withdraws $20 million from her account. (b) Immediately after the withdrawal, does JB meet the Federal Reserve requirement? (c) What amount of reserves is JB required to hold after the withdrawal?

Part 3: Suppose that JB's second largest investor, Lannister, finds $10 million in her couch cushions and deposits the full $10 million with JB. If JB continues to hold twice the amount of the minimum amount reserves required by the Federal Reserve, what is the largest amount that the money supply can increase by? What is the smallest amount?

Answer 1

31) Labor force participation rate = Labor Force / Adult population * 100

Unemployment rate = Number of unemployed / Labor force * 100

Labor force = unemployed + employed

a. A car manufacturing company goes bankrupt and is forced to lay off all of its workers. All the laid off workers believe that they do not have skills for a new job and do not look for new jobs. : When the workers are laid off the adult population does not change , number of unemployed also does not change . This is because the workers do not look for new jobs , so they are no more in the labor force , LF declines , number of employed declines . So unemployment rate increases , LFPR decreases .

b. College graduates begin to look for jobs just as a recession begins. Firms are not looking to hire college graduates but the new college graduates are actively looking for jobs. : Begin to look for jobs actively so now comes under unemployed people , LF increases , number of of unemployed also increases , so effect on UR is ambiguous . LFPR increases , since population of adults is constant .

c. The stock market crashes. As a result, workers who were close to the age of retirement delay retirement and continue to work. : Here no value changes since workers do not retire and go out of labor force . Nothing is mentioned about new addition to the labor force .

d. As a result of more accessible healthcare, people are healthier and living longer lives. : Since life expectancy increases , LF increases , LFPR also increases . Unemployment rate depends upon job availability .

Unemployment rate is the better statistic since it gives us the percentage of people actively looking for work but has not got one .