1) The natural rate of unemployment is also the steady-state unemployment rate, the unemployment rate toward which the economy moves. Once the economy reaches this steady state, the unemployment rate tends to remain the same. Now consider the following situation: Suppose that there are 2,300 employed people in the economy and 200 unemployed people. Suppose, further, that 23 percent of the unemployed find jobs each month and that 2 percent of the employed lose their jobs each month.

A) Consequently, at the beginning of the next month, what is the total number of unemployed people U and what is the total number of employed people?

B) Why is this situation an example of a steady state (or natural) unemployment rate?

C) What is the current unemployment rate?

2) Suppose that the government increases the amount of unemployment benefits paid to unemployment insurance recipients. Such an increase in unemployment insurance tends to decrease the probability of the unemployed finding a job and to increase the probability of job separation. Suppose that the rate of job finding falls to 20 percent per month, while the rate of job separation rises to 3 percent per month.

A. How many unemployed people will find a job during the first month following the change in unemployment benefits?

B. How many of the 2,300 people now employed will lose their jobs and become unemployed during the month?

C. What is the current unemployment rate? What is the steady state (or natural) unemployment rate?