# HW 5 Solution - Econ 201 HW 5 65 1 Use the table to answer...

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Econ 201 HW 5 65 1. Use the table to answer the following questions: (11) Population* Labor Force Employed Persons Unemployed Persons Labor Force Participation Rate Unemployment Rate Employment/ Population Ratio 500,000 410,000 381,300 28,700 82% 7% 76.3% 500,000 400,000 381,300 18,700 80% 4.7% 76.3% *Population refers to the adult, civilian, non-institutionalized population a) Find the number unemployed, the labor force participation rate, and the unemployment rate. Complete the first row of the chart above. Labor Force = Employed + Unemployed 410,000 = 381,300 + Unemployed 28,700 = Unemployed LFPR = (labor force/population)*100 (410,000/500,000)*100 = 82% Unemployment rate = (unemployed/labor force)*100 (28,700/400,000)*100 = 7% Employment Population Ratio = (Employed/Population)*100 381,300/500,000*100 = 76.26% b) Say 10,000 unemployed workers become discouraged. Complete the second row of the chart above. Discouraged workers no longer count as unemployed because they have stopped looking for work. They are no longer considered part of the labor force for the same reason. So we must reduce the labor force by 10,000 and the number of unemployed persons by 10,000. If we recalculate, we get the values above. 2. Why might the unemployment rate fall even if the economy is doing poorly? How can you use both the employment-population ratio and the unemployment rate to see if the economy is doing well? (2) As we can see in #1, if workers become discouraged, they are no longer considered unemployed and therefore the number of unemployed people falls. This will reduce the unemployment rate. However, the fact that more workers are becoming discouraged implies that the economy is doing poorly, which is why workers are becoming discouraged about their job prospects.

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We can see if the economy is doing better by using both the unemployment rate and the employment population ratio. If the unemployment is falling (or even staying constant) and the employment-population ratio is growing, the economy is doing well. If the unemployment rate is falling and the EPR is also falling (or even remaining constant), it implies the economy is not doing so well. 3. What might happen if the unemployment rate falls below the natural rate of unemployment? (2) If the unemployment rate falls below the natural rate, employers will have to drastically increase the wages they pay to retain/attract employees. This will increase inflation. 4. List one thing that might increase the natural unemployment rate. List one thing that might decrease unemployment rate. Explain your answers. (Hint: anything that increases frictional or structural unemployment will increase the natural rate. Anything that decrease frictional or structural unemployment will reduce the natural rate.) (4) There are many possible answers to this one. The key is to find something that will affect frictional or structural unemployment in the economy, rather than cyclical. Here are two sample answers: More generous unemployment benefits will likely increase the natural rate of unemployment.
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