Insert TableC rt ext Shape men Chapter 6 Questions: Use the following informatio

Question

Insert TableC rt ext Shape men Chapter 6 Questions: Use the following information to answer questions 1-3 Suppose the population of a country is 2.7 million and the labor force is 1 million, 930,000 of whom are employed. Assume the full-employment level occurs at a 3 percent unemployment rate at a real GDP of $100 billion. 1) What is the unemployment rate? 2) How many more members of the labor force must find jobs for the economy to achieve ful employment? 3) Based upon Okun's Law, how much potential GDP has been lost because the economy is not at full employment?

Explanation / Answer

1.

Unemployment rate = (Labor force-employed people)/ labor force

Unemployment rate = (1000000-930000)/1000000 = 7%

2.

Unemployment rate when economy is at full employment = 3%

So,

Number of more people to be employed for full employment level = (7%-3%)*1000000

Number of more people to be employed for full employment level = 40000

3.

As per the Okun’s Law, 1% decrease in unemployment rate, corresponds to the 3% increase in real GDP.

So, 4% of increased level of unemployment = 3*4% = 12% of decrease in real GDP

Hence, 12 Billion (12%) of the real GDP will be lost due to increased level of unemployment.

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