Macroeconomics Problem Set 2: Unemployment and Inflation

This assignment provides detailed solutions to an economics problem set. It begins by calculating the labor force, unemployment rate, and natural rate of unemployment for a given country, analyzing whether the economy is in recession or expansion. The solution then presents current unemployment rates for the United States, including rates for adult women and teenagers, based on data from the Bureau of Labor Statistics. The assignment further explores labor force participation and unemployment rates in a hypothetical country, calculating the impact of discouraged workers on the unemployment rate. Finally, the solution delves into the Consumer Price Index (CPI), calculating the percentage increase needed in income to maintain purchasing power from 1991 to 2017, and determining the required income increase from 1964 to 2018 to match a previous income level, accounting for inflation. The assignment utilizes formulas and real-world data to illustrate key macroeconomic concepts.

1.) a.)
We know that Labour force comprised of employed population plus unemployed population of total
labour force, here in this case, employed and unemployed populations are given and we need to find
total labour force. Its calculations are elaborated in following lines.
Employed population = 100,000
Unemployed Population = 12,000
Hence, Labour force = 100,000 + 12,000 = 112,000
Therefore, Labour Force = 112,000
b.)
Unemployment rate is a rate which is proportion of unemployed labour force from total labour force
in an economy, in spite of being part of labour force and willing to work full time or part time, but,
not get job due to some reason or others. It is calculated in following paragraph in detail:
Total Labour force = 112,000
Unemployed labour = 12,000
Unemployment rate = (Unemployed Labour force / Total labour force) * 100
Unemployment rate = (12,000 / 112,000) * 100
Unemployment rate = 10.71 %
c.)
When frictionally unemployed and structurally unemployed people combined together and form
part of total unemployed people of total labour force it is called natural rate of unemployment and it
is depicted as percentage of total labour force.
To find natural rate of unemployment =
(Frictionally unemployed + structurally unemployed) / total labour force
= ((7,000 + 2,000) / 112,000)) * 100
= (9,000 / 112,000) * 100
Natural rate of unemployment = 8. 035

d.)
As per the Economists views, natural rate of unemployment can occurs even when the economy is
healthy. It is consider “natural” rate because it is the unemployment rate that would result from the
combination of economic, social, and political factors that exist at a time - assuming the economy
was neither booming nor in recession. As structural unemployment and frictional unemployment
are part of natural rate of unemployment, it is important to mention here that its presence in an
economy does not indicate that economy is in grip of recession, rather than that, even presence of
natural rate of unemployment, it indicate that economy is in expansion mode and it is growing
smoothly.
As we know that, structural employment occurs when there is technological advancement is taking
place in an economy and because of that people needs to enhance their skill set as per the latest
requirement, whereas, in case of frictional unemployment which occurs when people look for
better job and higher remuneration and leave the present job. So, both of these factors indicate that
economy is neither slowing down nor in recessionary position. In fact it indicate healthy economy for
a country.
Frictional unemployment and structural unemployment can never be a sign of recessionary economy
it is sign of expansionary economy, here, in these case unemployment occurs because of economy is
expanding and new technological advancement is taking place and people are replacing low paying
job with high paying job with better facility. So, this kind of economy cannot be recessionary
economy, it will be expansionary economy. Sometimes people willing leave the job and sit in home.
(The Balance, 2019).
2.)
As per the data provided in Bureau of Labour Statistics of United States of America, following data
are provided in paragraph given below:
a.)
The unemployment rate for the United States remained at 3.6 percent in May, 2019 and the
number of unemployed persons was at 5.9 million.
b.)
The unemployment rates for Adult women (3.2 percent),
c.)
The unemployment rates for Teenagers (12.7 percent)
Source: https://www.bls.gov/news.release/pdf/empsit.pdf

3)
3.) a.)
To calculate the labour force participation rate, divide the current labour force in an
economy/country/ area by the population of that economy/country/ area.
Labour force participation = (labour force/Total population)*100
= (170 million /200 million)*100
Labour force participation rate = 85 %
b.)
Unemployment rate
Labour force = 170 million
Unemployed labour = 10 million
Unemployment rate = (Unemployed Labour force / Total labour force) * 100
Unemployment rate = (10 million / 170 million) * 100
Unemployment rate = 5.88 %
c.)
If 3 million of the unemployed become discouraged and stop looking for work, the new
unemployment rate:
New Unemployment rate
New Labour force = 170 million – 3 million = 167 million
New Unemployed labour = 10 million – 3 million = 7 million
Unemployment rate = (Unemployed Labour force / Total labour force) * 100
Unemployment rate = (7 million / 167 million) * 100
Unemployment rate = 4.19 %
4.)
The CPI, or Consumer Price Index, is used to measure the cost of a typical basket of goods. How
much money would the group need in 2017 to have the same amount of real purchasing power that
they did in 1991 will depend upon what was CPI in 1991 and what it changes to in 2017. As given in
question the consumer price index in 1991 was 136.2 and in 2017 it changes to 244. Impact of this
change in CPI can be elaborated in following way:

Taking 1991 as base year, as per the given consumer price index data.
From 1991 to 2017 consumer price index increases from 136.2 to 244,
That is, actual change in CPI from 1991 to 2017 = 244 – 136.2 = 107.8
To calculate price rise or percentage inflation during this period we can apply the formula: ((CPI end
– CPI start) /CPI start))*100
So, we have (244 -136.2)/136.2 =
(107.8/136.2)*100 = 79.148
Therefore, the group in 2017 would need to increase her income 79.148 % more than in 1991 to
keep its purchasing power at same amount what they had in 1991.
5.)
Grandmother made $75 working part-time during December 1964 when the CPI was 31.3. She
would need increased amount in July 2018 since, CPI index has increased from that period and now
it is standing at, that is, in July 2018 at 252.006.
Change in CPI from Dec. 1964 to July 2018 = 252.006 – 31.3 = 220.706
Need to have earned in July of 2018 to have at least as much real income as your grandmother did in
1964.
To calculate price rise or percentage inflation during this period we can apply the formula: ((CPI end
– CPI start) /CPI start))*100 (McMahon, T. 2019).
So, we have (252.006 -31.3) / 31.3
= (220.706/31.3)*100 = 705.130 %
It required 705.130 % increase in its earning in July 2018 to equal her income of Dec. 1964.
Therefore, income in Dec. 1964 $ 75
Income in July 2018 needs to increase 705.130% of Dec. 1964 income of $ 75
= $75 * 705.130 % = $ 528.847 in July 2018 to keep her income level at Dec. 1964 level.

References:
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