Practice Questions 6-

Multiple Choice Questions:

1. Which of the following statements is true?

a. The natural rate of unemployment is equivalent to the NAIRU, or the non-accelerating inflation rate of unemployment.

b. The Classical Model assumes the economy operates at the natural rate of unemployment.

c. The rate of unemployment depends solely on the rate of job separation.

d. All of the above.

e. (a) and (b)

2. Which of the following  are not included in the civilian labor force?

a. The population under sixteen years of age

b. The population housed in prisons or institutions

c. Those people who are categorized as discouraged workers

d. Full-time military

e. All of the above are excluded from the civilian labor force.

3. If the unemployment rate is in a steady-state equilibrium then it must be true that

a. There are no discouraged workers.

b. The rate of job separation exceeds the rate of job finding.

c. The rate of job separation equals the rate of job finding.

d. The rate of job separation is less than the rate of job finding.

e. None of the above.

4. If the rate of job separation decreases holding everything else constant, then

a. The rate of job finding increases.

b. The rate of job finding decreases.

c. The unemployment rate decreases.

d. The unemployment rate remains at its steady-state level.

e. The unemployment rate increases.

5. An increase in the rate of job finding holding everything else constant results in a(n)

a. Decrease in the natural rate of unemployment.

b. Increase in the natural rate of unemployment.

c. Decrease in the unemployment rate.

d. Increase in the unemployment rate.

6. Let L equal the labor force, E the number of employed workers, and U the number of unemployed workers.  The unemployment rate can then be written as

a. L = E + U

b. L = E/L + U/L

c. U/L = E/L - 1

d. U/L = 1 - E/L

7. Let s equal the rate of job separation and f equal the rate of job finding.  If the labor market is in the steady-state, then the employment rate can be written as

a. s/(f + s)

b. f/(f + s)

c. (f + s)/s

d. (f + s)/f

8. Let s equal the rate of job separation and f equal the rate of job finding.  Then, if the labor market is in the steady state, the unemployment rate can be written as

a. s/(f + s)

b. f/(f + s)

c. (f + s)/s

d. (f + s)/f

9. Let L equal the labor force, E the number of employed workers and U the number of unemployed workers.  The unemployment rate can then be written as

a. U/L

b. 1 - E/L

c. (L - E)/L

d. All of the above

Problems:

1. Consider an economy that initially has 5000 employed people and 500 unemployed people.  Suppose that each month 25% of the unemployed find jobs while 5% of the unemployed lose their jobs.

a. What is the initial unemployment rate?

b. At the end of the first month, how many of the initially unemployed people will find jobs

c. At the end of the first month, how many of the initially employed people will lose their jobs?

d. What is the unemployment rate at the end of the first month?  Use the following table to make this calculation easier.

e. During the second month these events continue.  At the end of the second month what is the unemployment rate?  Again the table may make this calculation easier.

f. What is the steady-state level of unemployment for this economy?

g. Some months out (nth month), this economy finds it has 916.67 unemployed people and 4583.33 employed people. 

i. What is the current unemployment rate?

ii. At the end of the month (beginning of the next month) what is the unemployment rate?

2. Suppose our economy initially has 9000 employed people and 1000 unemployed people and that the initial rate of job finding is 10% per month and the initial rate of job separation is 1.1% per month. 

a. Is this economy at a steady-state level of unemployment?

b. Suppose government programs to assist the unemployed are changed so that the unemployed receive fewer benefits.  What do you expect will happen to the rate of job finding given this change?

c. Suppose the rate of job finding increases to 12% per month.  Fill in the following table to calculate the unemployment rate one month (m + 1)after this change occurs.

d. Repeat the exercise in (c) for a second month (m +2).

e. What is the new steady-state level of unemployment?

f. How many unemployed people will there be in the steady-state (let's say this happens in month z) in this economy?

g. Using the number you found in (f) complete the table below to verify that this in indeed the steady-state of employment for this economy.