Question

8. Study Questions and Problems #8 True or False: It is reasonable to expect the unemployment rate to fall to 0% in an economy. True False Assume the natural rate of unemployment in an economy is 5%. The following table summarizes the frictional, structural, and total unemployment in the economy. Unemployment Type Unemployment Rate (Percent) Frictional unemployment 2 Structural unemployment 3 Total unemployment 8 Given the previous information, the cyclical unemployment rate in this economy is____%. Therefore, this economy____ (is/is not) at full employment.

Answer 1

Answer 8

This statement is False. Even in full employment there are some who are still unemployed like those who are switching jobs, some are unemployed due to technological change and these change results in some level of unemployment and because of this It is NOT reasonable to expect the unemployment rate to fall to 0% in an economy.even in the long run.

Natural unemployment rate = Frictional unemployment + Structural unemployment = 2% + 3% = 5%.

Cyclical unemployment rate = Actual unemployment rate - Natural unemployment rate = 8% - 5% = 3%.

Hence, Cyclical unemployment rate = 3%.

When economy is at its full employment we means that actual unemployment rate = Natural unemployment rate or cyclical unemployment rate = 0. Here, Actual unemployment rate > Natural unemployment rate (or cyclical unemployment rate > 0). So this economy is not at its full employment.

Hence,  the cyclical unemployment rate in this economy is 3%. Therefore, this economy is not at full employment.